How does the new score help F&I managers who want lower cutoff score?
Auto lenders use credit score as an important factor in approving or disapproving credit applications and for setting “scorecards” with cutoffs for different tiers of risk-based pricing. Fair Isaac said its new score is about 15 percent more accurate than the previous generation at predicting the likelihood that someone will default.
“It is a much better predictor of future risk,” says Rachel Bell, the company's director of global scoring solutions. Better computer technology and an ever-growing database of consumer payment behavior allow the company to update its credit scoring system periodically.
That means that within limits, the new score allows an auto lender to lower a cutoff score and make more people eligible for approval without incurring additional risk, Bell said in a recent interview. Alternatively, a lender can keep its cutoff score the same and expect losses to go down, she said.
Fair Isaac said lenders are still testing the new credit score.
“It depends if they're looking at a strategy to increase their overall portfolio size, if losses are at what they consider an acceptable level, or they could have a strategy to curb losses that are too high and they need to reduce those,” Bell says. “Some are doing a little bit of both.”
The new FICO 8 scoring formula has the same 300 to 850 score range. The new score reassigns some individuals who are better risks than they appeared under the old scoring system and reassigns others because they're worse risks. Fair Isaac says that if you take the same sample of consumers, the new score pushes about 3.5 percent of the population out of middle categories of risk and into either the high-risk range, from 300 to 499 on the FICO scoring scale, or the low-risk end, 800 to 850.
Fair Isaac said about 2,500 banks and other financial institutions use the new score. One of those is used-car specialist Santander Consumer USA Inc.
Fair Isaac eventually will phase out the previous-generation score but for now both are available, Bell says. She says there's no extra charge for using FICO 8; it's up to lenders to decide which score to use.