Changes to a widely used credit score may make it more likely for consumers struggling with low scores to obtain loans. Fair Isaac Corporation’s newest FICO® credit scoring model will change certain aspects of how it computes the information on an individual’s credit report. The changes come in the wake of discussions with lenders and regulators looking to find ways to increase consumer lending without creating additional credit risks.
Highlights of the changes
These are some of the changes included in the FICO® Score 9 formula:
- Any debt that has been repaid or settled with a collection agency will not be included in a consumer’s credit score calculation
- Medical debt that is in collections will have a smaller effect on a consumer’s credit score
- The scoring formula will incorporate new techniques to better assess the risk of consumers with limited credit histories
Why is there a focus on medical debt?
More than half of collections on credit reports are related to medical bills, according to the Federal Reserve. Quite often, consumers may not even realize that medical debt has gone into collections if they have had problems with billings and insurance payments. These collections issues can remain on a credit report for up to seven years, regardless of whether they were later resolved, and can affect consumers’ ability to obtain loans (Source: CFPB Press Release, CFPB Study Finds Medical Debt Overly Penalizes Consumer Credit Scores, May 2014).
What do the changes mean for consumers?
According to Fair Isaac Corporation, the changes to its scoring formula could result in some consumers receiving a FICO® Score increase of up to 25 points. Even small credit score increases may help consumers qualify for better interest rates from lenders (although other factors are also considered).
Fair Isaac Corporation isn’t the only credit scoring company that has adjusted the calculations for its credit scoring formula. A lesser known company, VantageScore Solutions, already has a credit scoring formula that does not include paid collections on its credit reports. Other credit scoring companies may follow suit and make adjustments to their credit scoring calculations.
Fair Isaac Corporation hopes to begin releasing the software for FICO® Score 9 in the fall. However, it is up to individual lenders whether or not to upgrade to the newer version. As a result, it may take some time to gauge whether the changes will have an impact on consumer lending.
Article contributed by Dempster R. Cherry. To find out more click here.
A study by the Consumer Financial Protection Bureau found that many credit scoring formulas underestimate the creditworthiness of a consumer who owes medical debt in collections. (Source: CFPB Data Point: Medical Debt and Credit Scores, May 2014)