FICO Scoring Changes Could Help Borrowers

FICO, the most widely used credit-scoring system, announced last week that it will soon change some of the criteria it uses to calculate consumers’ credit scores.

The changes include reducing the impact that overdue medical bills can have on credit scores, as well as removing paid off collections from consumers’ credit scores.

According to The Wall Street Journal, of the 106.5 million consumers with a collection on their credit report, 9.4 million did not have a balance. With the new credit-score system, those 9.4 million consumers won’t be penalized. The new FICO scores will ignore any collections that have already been paid off. The previous version factored paid and unpaid collections equally.

The latest version of FICO’s scoring system will no longer weigh medical debts as heavily as it previously did. Individuals who have an otherwise clean credit history, except for unpaid medical debts, may see their FICO score increase by as much as 25 points. This means consumers may qualify for more favorable interest rates on loans, which could save them thousands of dollars.

The changes come after a recent Consumer Financial Protection Bureau study, which found that consumers may be unfairly penalized for medical debts that go to collections. Unpaid medical bills are different from other unpaid bills.  In some cases, medical bills end up going to collections because of a billing error, and consumers may not even be aware that the debt was sent to collections.

The FICO changes will go into effect this fall. Unpaid debts will not be removed from a credit report with the new credit scoring changes, so lenders may still factor that information into their lending decisions.