A Better Measure of Financial Health

Financial institutions rely heavily on credit scores to evaluate a person’s overall financial state. But a credit score, while important, is only one financial data point among many. And especially since millions of Americans—and their credit scores—have still not fully recovered from the global financial crisis that hit eight years ago, the Center for Financial Services Innovation, or CFSI, believes we need a broader framework than credit scores alone to get a meaningful picture of a person’s financial condition.

CFSI consulted with more than 85 industry leaders to identify a set of key financial health indicators. The indicators allow banks, credit unions and other financial institutions to measure consumers’ financial health more accurately and to serve them with better products, while giving consumers themselves a tool to understand their own financial situation better, too.

CFSI’s research identified eight key indicators to best measure financial health:

1. Spend less than income. Successfully managing cash flow affects the ability to build savings and be resilient in the face of unexpected events.

2. Pay bills on time and in full. Keeping up with bill payments tells whether a person is able to manage cash flow and daily financial obligations.

3. Have sufficient liquid savings.The ability to draw on liquid savings is important for coping with unexpected expenses (e.g., car repair) or setbacks (e.g., losing a job).

4. Have sufficient long-term savings or assets. Long-term savings are crucial for achieving financial security and taking advantage of opportunities, like a home purchase or higher education.

5. Have a sustainable debt load. Keeping debt to manageable levels can protect a person from being consumed by late fees or interest payments, which may lead to further financial difficulties.

6. Have a prime credit score. As noted above, a credit score is not the full story about financial health, but it still remains one important piece of the picture. It affects a person’s ability to access affordable credit.

7. Have appropriate insurance. Along with sufficient liquid savings, having appropriate insurance allows a person to be resilient in the face of unexpected expenses.

8. Plan ahead for expenses. Planning ahead shows that a person is future-oriented and proactively managing his or her financial situation—behavior that is strongly correlated with financial health.

CFSI is now working on models to turn the indicators into a numeric score, similar to the conventional credit score but incorporating the richer data that the indicators yield. Efforts are also underway to encourage financial institutions across the United States to adopt the indicators. Because they give a fuller and more nuanced picture of financial health, CFSI believes that these eight indicators provide a better basis for financial institutions to design products that will serve customers’ needs more effectively.

CFSI is the authority on consumer financial health, leading a network of committed financial services innovators to build better consumer products and practices. CFSI’s mission is to improve the financial health of Americans, especially the underserved, by shaping a robust and innovative financial services marketplace with increased access to higher quality products and practices.