Credit Scores Aren't Enough. It's Time for Financial Health Scores

The world of consumer-facing financial services is changing rapidly in a digital age. At the Center for Financial Services Innovation, we set out to identify a tool up to the task of measuring one's overall financial state in an effort to better understand and to influence the overall financial health of consumers. Our search, beginning almost two years ago, came up empty because such a metric simply did not exist.

Until now, the credit score has been used as the default measure; however, we intuitively know that the credit score is a clunky tool for this type of holistic financial assessment. Credit scores are meant to do something very specific: automate predictions of future loan-repayment behavior based on past loan repayment behavior. Our industry can do a lot better at providing tools to more effectively assess consumer financial health.

Financial life, after all, encompasses much more than just loan repayments. Are consumers keeping up with their bills? Are they able to tuck away some savings each week or month for emergencies and for long-term goals like retirement and a child's education? Are their families protected from financial shocks through proper insurance coverage?

Over the past year, CFSI has analyzed and synthesized data and insights from more than 20 consumer finance studies, including CFSI's consumer financial health study, and consulted with more than 85 financial services providers and influencers to identify the key indicators of financial health.

Undoubtedly, it is difficult to distill something as complex as a financial life into a handful of key indicators.  Like physical health, an individual's financial situation is incredibly complex and affected by many things beyond her own behavior, including exogenous factors like economic circumstances and the quality of financial services available.

Yet, we track high-level indicators like weight, blood pressure, cholesterol and body-mass index for our physical health, knowing that there are many more factors that affect our physical well-being. Likewise, we need a starting point to gauge our financial health. 

With these goals in mind, we have identified eight key indicators that our research shows best measure financial health and provide a way to move beyond the credit score and gain a more comprehensive understanding of customers' financial lives and needs. 

1. Spend less than income: It doesn't get more basic than this, but an individual's ability to successfully manage cash flow and spend less than income directly affects her ability to build savings and stay resilient in the face of unexpected events.
2. Pay bills on time and in full: How well an individual is keeping up with bill payments sheds light on how well she is able to manage cash flow and day-to-day financial commitments.
3. Have sufficient liquid savings: This is critical for coping with an emergency or a financial shock, whether it's an unexpected expense (like a car repair) or a sudden drop in income (like getting laid off from a job).
4. Have sufficient long-term savings or assets: While short-term savings is important for emergencies, equally important is long-term savings to achieve financial security and to take advantage of opportunities, such as a child's education or investing in a home.
5. Have a sustainable debt load: Credit is a powerful tool that must be used carefully. A manageable debt load suggests that an individual will not be consumed by late fees or become overindebted, which could lead to further financial difficulties.
6. Have a prime credit score: Although we've already made the case for why the credit score is an imperfect indicator of overall financial health, it is still an important piece of the picture. Credit scores shed light on an individual's ability to access low-cost credit and the propensity to pay it back.
7. Have appropriate insurance: This is the only indicator specifically linked to a financial product because having appropriate insurance allows an individual and her family to be resilient in the face of unexpected expenses, such as the death of a loved one or a medical emergency.
8. Plan ahead for expenses: The behavior of planning ahead for expenses indicates that an individual is future-oriented and interested in improving her financial situation.

Now we are turning these eight indicators into an actionable financial health score. During the remainder of 2016, a handful of financial providers will test the feasibility of the score and whether it provides a more holistic view of an individual's financial well-being than a simple credit score. As a nonprofit, CFSI will not sell or merchandise the scores for revenue.
Our vision is that a robust financial health score will provide benefits for financial providers and consumers. Providers could identify which products are moving the needle for their customers and which are not. They could see which customer segments have difficulty saving for retirement and which have trouble building a stable credit score. They could identify profitable strategies to build their customers' financial health by leveraging new technologies and business practices to genuinely understand the challenges their customers face. 

By calculating financial health scores, providers would begin to see how an investment in improving consumer financial health could translate into an improvement in their own financial outcomes. Likewise, consumers could gain a holistic understanding of their financial health and determine the effects of the financial products they use and the financial behaviors they exhibit, rather than cobble together piecemeal measures like the credit score or account balances.

This is a 21st-century tool we should all rally around.

Sarah Parker is a director at the Center for Financial Services Innovation. Join CFSI in elevating this important issue by using #FinHealthMatters on Twitter and blogs on June 29, #FinHealthMatters Day. MetLife Foundation is a major sponsor of CFSI's consumer financial health work.