8 waysChanges 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.

 

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