Despite the cooling autumnal weather, the competition within the American auto industry continues to heat up, as automotive dealers find themselves fiercely competing to sell their cars and trucks to as many ‘qualified’ customers as possible. Still, even amid that fierce competition, auto lenders seek to balance the need to maximize sales–while minimizing the risk associated with auto loans.
One of the key tools utilized by auto lenders in striking this critical balance is the well-known ‘FICO Score’, a widely-used measure of a consumer’s credit risk; in 2013 alone, lenders nationwide purchased more than 10 billion FICO scores.
However, while the FICO score is both widely known and used, less recognized is the fact that there are multiple versions of FICO utilized by lenders in various business sectors; for auto lenders, ‘FICO 8 Auto Score’ is rapidly becoming the most useful—and popular—FICO choice when measuring the risk of a potential auto customer.
There are multiple differences between the standard FICO and the FICO 8 used within the auto industry.
Experts within the lending industry believe that FICO 8 allows lenders and auto dealers to jointly share more consistent information, due to the FICO 8’s ability to better assess risk; as far back as 2011, more than 3,500 banks and financial institutions were already choosing to rely on FICO 8.
By focusing more attention on the most relevant—and reliable—consumer information, FICO 8 has come to be viewed as a “better, more reliable picture” of the real risk associated with a potential loan to an auto consumer.
With a strengthened national economy, strong consumer confidence and continuing low interest rates, American auto sales broke all records in 2015, and sales remained brisk into the new year. However, gradual increases in interest rates and the uncertainties resulting from an election year, mean that auto dealers are now competing even more fiercely for each new sale. That means that each business decision—particularly one as critical as approving an auto loan—becomes even more important in achieving a successful sales year.
A recent study conducted by FICO found that upgrading to the FICO 8 Auto Score held several benefits for auto lenders and dealers. According to the study by FICO, the benefits of using FICO 8 included:
- The approval of more applicants, often at better lending rates
- Improved sub-prime approvals: Unlike some other FICO scores, the study found that FICO 8 minimizes the credit impact of other public records such as medical and financial collection expenses, and focuses more exclusively on auto loan-related history
- FICO Score 8 is also more sensitive to highly utilized credit cards. So if a credit report shows a high balance close to the card’s limit, FICO Score 8 will likely be more impacted than a previous score version.
- All FICO Score versions include authorized user credit card accounts when calculating a person’s score. This can help people benefit from their shared management of a credit card account. It also helps lenders by providing scores that are based on a full snapshot of the consumer’s credit history.
- To protect lenders and honest consumers, FICO Score 8 substantially reduces any benefit of so-called ‘tradeline renting’, a credit repair practice that entices consumers into being added to a stranger’s credit account in order to misrepresent their credit risk to lenders. In addition, FICO Score 8 ignores small-dollar “nuisance” collection accounts, in which the original balance was less than $100
The end result of using FICO 8 for an auto loan—as opposed to other FICO scores–is more often than not a “win/win” scenario, in which the consumer receives more affordable rates and payments, while the lender has access to FICO information that more accurately predicts the borrowers’ ultimate ability to pay on schedule.
Little wonder then that in today’s fiercely competitive auto industry, FICO 8 is often seen by lenders—and dealers–as a welcome ‘leg up’ on the auto dealer competitor just down the road.