A single financial score largely determines whether consumers can borrow money for houses, cars and other wants and needs — and how much loans will cost them. But it's expected to get easier for some consumers, as Fair Isaac Corp. changes how it tracks those important FICO scores.
The San Jose, California, company recently announced plans to change the weight it gives medical debts in making the calculation. And it said it will stop counting debts that went to collection if the bill has been paid or settled.
The change will be implemented in the fall.
Fair Isaac Corp. developed a credit-score formula that's most used to determine credit-worthiness. That score, FICO, is directly derived from its name.
The new FICO Score 9 represents a "more nuanced way to assess consumer collection information," the company announced. In a written statement it said that "this will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they present. These enhancements help lenders because they result in greater precision. At the same time, the median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 percent."
"The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk," according to the Wall Street Journal. "Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report."
A bureau report suggested that consumers were being unfairly penalized for medical debts sent to collections.
The WSJ said the changes should boost consumer lending, especially for those who were "shut out of the market or charged high interest rates because of their low scores."
"It probably doesn't mean the difference between an approval and a denial, but it can mean the difference in a more advantageous rate," John Ulzheimer, credit expert at Credit Sesame, told The New York Times.
He said consumers who had excellent credit files with the exception of unpaid medical debts that were sent to collection before being paid or settled would get the greatest advantage from the change. "That is when you would expect to see your score go through the roof," he said.
According to Bloomberg, "One in four U.S. families struggled to pay medical bills in 2012 and 10 percent said they had costs they couldn’t pay at all, the National Center for Health Statistics at the U.S. Centers for Disease Control and Prevention said in January. Among families in which all members were insured, 21 percent still had difficulty paying medical expenses, the agency’s survey found."
“This will increase the credit scores of many, some substantially,” Judith Fox, a professor of law at the University of Notre Dame and the director of the law school’s Economic Justice Clinic, told Bloomberg in an e-mailed statement. “For those consumers, credit will be easier to obtain.”
Break the Code has a great explanation of credit scores and how they might be used, how they're calculated and how to improve them.