FICO credit report innovation could reduce risky credit card debt
It’s a recurring theme of this blog that manageable credit card debt can in some circumstances be good. It can tide a family over during a short-term crisis, and it can give a significant boost to an economic recovery. Some experts reckon that 60 to 70 percent of the U.S. economy is based on consumer spending, so raising that level of activity could prove a prerequisite of a return to good times.
Credit card debt and obvious dangers
However, unmanageable credit card debt can, of course, be a disaster. On a micro level (and especially when coupled with high credit card rates), it can launch families into vicious, downward spirals of despair and ruin. And, as we’ve all seen very recently, it can on a macro level contribute to huge and unsustainable credit bubbles that, when they burst, do incalculable harm to the nation’s prosperity.
What’s needed is a way of encouraging responsible credit card use while steering those who can’t handle debt away from running up balances.
Credit reports that reveal more
On August 2, FICO, the company behind the systems that calculate most credit scores in the U.S., unveiled its Bankcard Growth Solution, which it described as a “unique new analytic solution designed…to help lenders improve decisions based on deeper analytic insight and accelerated learning across all stages of bankcard acquisitions and originations.”
In other words, it’s supposed to help credit card companies be smarter about whom they choose to issue cards and lend money. And it couldn’t have come at a better time. Credit card use is up, and the rate at which consumers are paying down card debt is slowing and may be reversing (see Credit card debt makes a rare uptick). Meanwhile, card issuers are falling over each other to attract new customers.
And all this is happening at a time when nothing about the economy is certain. As Andrew Jennings, FICO’s senior vice president and chief analytics officer, observed in a statement:
The ‘new normal’ in the banking industry is characterized by economic uncertainty and changing consumer behaviors, so banks have to figure out how to grow profitably despite the lack of stability. The most forward-looking banks are adopting analytic solutions that increase their capacity to learn, adapt and innovate. With its Analytic Learning Hub, the FICO Bankcard Growth Solution helps lenders make the decision that’s appropriate for each customer, learn from that decision’s results, and improve future decisions, in much faster cycles.
Much more needed
It’s unlikely that even FICO would suggest that its new offering is going to eliminate problem credit card use. To start with, Jennings says that only “forward-looking banks” are likely to adopt it, and, judging by Wall Street’s performance over the last decade, there are precious few of those around. More importantly, no profiling/data-mining IT solution is currently capable of predicting an individual consumer’s behavior with any great accuracy.
But it’s encouraging that FICO believes there are enough credit card companies out there that are taking credit risk management sufficiently seriously to make its new launch worthwhile. Perhaps they really have learned their lesson.
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