On August 7th, 2014, FICO announced some new details about their new credit score rules, the FICO Score 9. Every so often, FICO updates their credit scoring analysis algorithms to help companies better determine the credit risk of the score holder. This latest update will help many consumers by raising their credit scores. Learn how medical bills affect credit score in this article.
There are three major changes FICO made in this newest score. The first difference in the FICO Score 9 is how paid off collection agency debt affects your score. In the past, if you had paid off a debt that went into collections, it remained as a negative factor on your credit score. However, with the FICO Score 9, once you pay off a debt that had been in collections it will no longer have an impact on your credit score. This could significantly raise your credit score.
The second major change FICO made with the FICO Score 9 is related to medical debt in collections. Since medical debt is very different in nature from conscious consumer debt, it doesn’t follow the same default risk patterns as normal debt. It also isn’t as strong of an indicator of a consumers’ ability to repay debt because there is a huge potential for billing disputes. In addition most medical debt isn’t voluntarily entered into due to medical conditions that can easily be outside of your control.
Due to these factors, the FICO Score 9 will differentiate medical debt vs. non-medical debt and the new score will not weigh medical debt as heavily as non-medical debt. FICO states in a press release that “The median FICO Score for consumers whose only major negative references are medical collections will increase by 25 points.” That’s huge news!
The final change helps lenders better evaluate people will little to no credit history, commonly referred to as thin-files. In the past, thin files were measured in absolute terms, such as whether or not a debt has been paid. Going forward, the FICO Score 9 will look at thin files in a more nuanced way to take into account more factors that accurately predict future payment patterns. FICO did not disclose what these factors are, but any credit evaluation that helps people with thin files will be much appreciated by those with little to no credit history.
According to www.MyFico.com , the FICO 9 changes will be available to lenders starting in Fall of this year. However, just because it is available doesn’t mean that lenders will use the new FICO Score 9 immediately.
Since FICO Score 9 has not yet been released to lenders it is difficult to predict how this change will affect consumers. On the surface, credit scores should increase which should benefit consumers. Better credit scores will qualify consumers for lower loan rates with everything from mortgages to credit cards.
The problem with the above is we must assume that lenders stick to the current credit score cut offs that they use today. However, if most people now have higher credit scores, lenders could just restrict lending to even higher credit score cut offs.
Instead of just needing a 740 credit score to get the best rate on a mortgage, the new FICO Score 9 might force lenders to change the cut off to 760. If this happens, there will be no major changes from the current lending environment. Alternatively, lenders may keep credit score requirements the same and instead pay more attention to other credit related factors.
Just because the FICO Score 9 will be released this fall to lenders doesn’t mean it will affect you immediately. The new scoring algorithm will be available, but generally lenders don’t switch to the new scoring systems immediately. Instead, companies test out the new scoring models on current loans to see how predictive they really are. When, if ever, lenders will switch to the FICO Score 9 is yet to be seen.
Overall, the FICO Score 9 makes some big changes to the FICO credit scoring model, but the affects of these changes won’t be known for months. These changes could greatly help those with medical debt and paid off collections debt, or it could just increase the credit requirements for the best rates. Only time will tell.
What do you think of the changes to the newest FICO Score 9? Do you think these changes will ultimately help or hurt consumers?
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