The formula for calculating the most widely used credit score will soon change to lessen the impact of bad medical debts and old accounts that are paid off.
FICO, which creates the most-used credit scores, said this week its new model offers ?a more nuanced way to assess consumer collection information.? It ignores paid collection agency accounts and differentiates medical from non-medical collection accounts.
The effect will be that medical debt turned over to collection agencies will have a lower impact on FICO?s brand of three-digit credit scores. The company claims 90 percent of U.S. lenders use the FICO brand score.
The median FICO score for consumers whose only major black credit marks are unpaid medical debts is expected to increase by 25 points, according to FICO.
Credit scores attempt to predict the probability a borrower will pay back a loan and pay bills, such as a wireless phone bill. They are important because consumers with the best credit scores also get the best loan interest rates, on credit cards, mortgages and auto loans, for example. Those with poor scores might not be able to get a loan at all. Credit scores can also affect auto insurance rates.
Credit scores attempt to summarize in a single number information contained in consumer credit reports from credit bureaus, such as TransUnion, Experian and Equifax. The reports, but not the scores, are available free once a year at annualcreditreport.com.
The Consumer Financial Protection Bureau in May released a research report claiming consumers credit scores may be overly penalized for medical debt that goes into collections.
?Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer?s credit score,? CFPB Director Richard Cordray said at the time. ?Given the role that credit scores play in consumers? lives, it?s important that they predict the creditworthiness of a consumer as precisely as possible.?
The new FICO score, dubbed, FICO Score 9, also attempts to better assess the creditworthiness of consumers with limited credit history, called thin files, FICO said. They might include young people with short credit histories or people who prefer to use cash instead of credit.
The new FICO score will be available to U.S. lenders starting this fall, FICO said.
Source: MCT Information Services