In the wake of government concern over credit scores being unfairly impacted by medical debt, FICO has announced that their new scoring model will change the way medical debts affect people’s credit scores.
The FICO 9 score will be able to differentiate medical and non-medical accounts in collections, and won’t take into account medical debt sent to collection agencies as heavily. Medical collections will have a lessened impact on credit scores and be more in line with the actual borrower risk they represent.
Medical debts are different from other types of debt because often, folks don’t even know the debt has been sent to collections. Because of insurance procedures, people may not even have been billed and therefore don’t know that the debt even exists.
As a result of these scoring changes, the median FICO score for people whose only negative credit report information is due to unpaid medical bills is expected to rise by 25 points. The new scores will be available to potential lenders though credit reporting agencies this fall.
Customers with “thin files” will benefit
People who have limited credit history – known as “thin files” – are set to benefit from the new FICO scoring model.
When there is little information for lenders to go on when making a credit decision, the quality of the applicant’s debt makes a difference. Since the new FICO score will give greater detail about types of debt, lenders can make a more informed decision about issuing credit to a particular applicant.
Jim Wehmann, an executive vice president at FICO, said the new scoring model would help both consumers and lenders. “FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently.”
FICO strives for consistency across credit bureaus
Because the three major credit bureaus – Experian, Equifax, and TransUnion – typically collect different information on consumers, credit scores can vary between bureaus. FICO aims to provide a consistent score across all three bureaus, including the most relevant information from each one.
Ninety percent of consumer lending decisions in the U.S. are based on FICO scores. They are used to determine creditworthiness not only by credit card issuers, but also by mortgage lenders, providers of auto, personal, and business loans, landlords, and even employers.