Consumer Loan Pricing with Four FICO Scoring Methods

The attached Excel workbook was based on Microsoft 365. Earlier Excel versions may not work properly.


I know this may look “old school” but then consider the author. This Excel workbook gives ideas on how you might want to set up a consumer rate pricing model, with four ways to calculate FICO scores.

I start with five consumer loan products:

New auto loans are the starting base rates for seven terms to maturity. All other loan types are add-ons. For example, a 36-month used RV loan would start with the 36-month new auto loan of 2.500% and then add another 2.500% for a total of 5.00%.

In addition, you might want to add on additional interest by dollar amount of the loan and/or there may be discounts for automatic payments, etc.:

Then the option to use one of four FICO methods, which will be explained later:

The pricing controls are a series of drop-down boxes that, when completed, totals up the interest rate for that loan:

Now the four FICO scoring methods:

Grouped Risk:

The first method is what I call the “Grouped Risk”, which is the traditional way of pricing FICO scores. If the borrowers FICO falls within a certain range, the corresponding predetermined interest rate is added onto the pricing model.

Break Point Risk:

This method uses the grouped method but includes the ability to elevate the risk after the FICO drops below certain levels. For example, if a study of defaults found that at certain FICO levels, defaults increased sharply. Putting a check next to each level that experiences more defaults, will increase all FICO risk scores from that point on. The amount of increase is determined by you and the number of checkmarks is potentially equal to the number of groups.

Exponential Risk:

This method also uses the grouped method, but instead of a linear increase in risk, it provides you with a growth rate for the various groupings.

Here is a chart showing the first three methods, and what they might look like:

This workbook has never been used in the real world, so there may be errors I did not catch.

Download FICO_2


Don Pistulka

Retired Credit Union CFO - Finance
Background: over 40 years in investments, asset/Liability management, banking, securities trader.
Worked for: California Credit Union, WesCorp, CalFed S&L, Crocker Bank, Carroll McEntee, Federal Home Loan Bank Board (D.C.), Western Asset Management, Security Pacific National Bank.

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