The Fair Isaac Corp, which produces the widely used FICO credit scores, announced big changes to the way it measures creditworthiness in its latest FICO Score 9 model. The changes will benefit millions of Americans suffering from bad credit.
The new credit score analysis methods will help Americans in three ways:
- Credit scores will not be penalized for charges sent to collection agencies once they have been repaid.
- Overdue medical bills will have a less negative effect.
- People with little credit history, so-called thin files, will be judged using a more nuanced approach.
Medical debt was the driving force behind the credit score changes. In May, the Consumer Financial Protection Bureau started pushing for more lenient policies for medical debts, since in many cases those overdue bills were not a valid indicator of a consumers ability to make payments. As a FICO spokesman explained:
“Often times medical collection happens because of miscommunication between a consumer and their provider, or a consumer and the insurance company. What we found through research was that it wasn’t an indicator that someone was in trouble and was becoming a higher risk to lend to.”
With the new modeling techniques in place, consumers with medical bills in collections can expect up to a 25 point change in their credit score.
As for people with little credit or other bills in collections, the exact benefits are not entirely clear. As the FICO press release explained:
“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.”
Although the language sounds promising, FICO does not fully explain how or how much those consumers will benefit.
The big winners in the credit score changes will most likely be the younger generation, age 19 to 29, who have had a far more difficult time securing lines of credit than previous generations.
On average a person in that age range will have 1.57 credit cards compared to the national average of 2.19, according to Experian. Likewise, the younger generation carries only $2,682 worth of credit card debt, compared with the national average of $4,501. With looser credit score judgments, 20-somethings will finally be able to rack up other debts to go along with their massive student loans.
Nevertheless, the changes are not a signal that the lending market is suddenly going to open the floodgates and return to pre-2008 levels.
People in those three situations should only expect moderate changes in their credit scores, and those will only happen when the new FICO Score 9 is adopted by wide-variety of lenders.
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