Fico recently introduced big changes to the way the credit
agency calculates scores. Consumer advocates had been petitioning the agency
for some time to implement rule changes, specifically pertaining to medical
bills. Medical costs are mostly out of a consumer’s control and consumers
reported being unaware that the account even existed or believed it was paid by
their insurance. What’s worse is that experts don’t believe that lack of
payment on medical bills is any indication of a consumer’s likelihood to pay,
which is supposed to be the score's intent. According to the Consumer Finance
Production Bureau’s report “Medical Debt and Credit Scores” released in May 2014,
concluded that consumers with medical accounts in collection that had more paid
than non-paid medical accounts were just as likely to pay a regular account as
well as a consumer with a score that was 20 points higher.
The predictive analytics software that Fico uses will now
have the ability to distinguish between medical and non-medical collection
accounts and adjust scores accordingly. Using the new system, a consumer whose
negative collection accounts are purely medical could see their score jump 25
points. 25 points can mean the difference between an approval and denial for
mortgages, auto loans and credit cards and offer consumer access to better
interest rates over all.
FICO Score 9 will also allow better scoring for “thin files”
or consumers with limited credit history. Where the previous system allowed for
scoring based off of a “pay” or “non-pay” or “yes” or “no” system, Score 9 will
use a more nuanced calculation that can determine the likelihood of repayment
even with a limited payment history.
FICO Score 9 will also unburden lower scores that are a
result of paid off collections or settlements. Prior to the changes, paid off
or settled account remained on your credit report for 7 years after paying or
settling. Under the new model, paid and settled accounts will be removed after
confirmation of payment. Out of 107 million consumers with a collection account
on their report, almost 10 million had a zero balance.
Here’s a summary of the changes:
- Medical Collections: Medical collections will be weighted
separately from regular collection account and no longer affect scoring as
heavily as other types of collection accounts.
- No Credit: Consumers with no credit history or limited
credit history will be calculated based off of a calculation to determine
likelihood of payments
- Paid or Settled Accounts: Paid or settled account will no
longer be considered when calculating your score.
The affect the new score calculation will have on consumers
is expected to be far reaching. The median increase for consumers whose only
negative credit items are medical is 25 points, and millions of Americans are
expected to be affected by the changes.