Got A Credit Score? Read This

There are some major changes coming to the way your credit score is calculated — and the changes are actually a gain for the consumer!

A good credit score is considered instrumental in securing just about anything these days, from apartment rentals to almost any loans. The score is based upon a person’s individual credit reports, created by the three major credit bureaus: Equifax, Experian, and TransUnion. The scores are based on a 300- to 850-point scale, with a lower score correlating to a worse credit rating. A low credit rating can have long-term, negative effects on an individual, and recovering from a low credit score can take years. Most lenders prefer a score of 700 or more.

The changes are coming to the metric used to calculate consumers’ FICO scores, which is the score used in an estimated 90 percent of all credit decisions. And the changes that the Fair Isaac Corp., which is the company behind your FICO score, is implementing will result in higher credit scores for many consumers.

The biggest changes include the way paid debts that have been assigned to collection agencies impact credit scores, as well as unpaid medical debt. Debts that do go to collection agencies but have settled will no longer have a negative effect on a FICO score, and unpaid or uncollected medical debts will no longer have as large of an impact on a consumer’s credit score.

In fact, medical debt is one of the driving forces behind Fair Isaac Corp’s recent decision to change the credit score metric. Last May, the Consumer Financial Protection Bureau said consumers “may be penalized too harshly for medical debt.” The CFPB drew a difference between medical bill debt and other types of debt or loan defaults, saying that medical debt is often more “expensive, unpredictable, and caused by disputes between medical providers and insurers.”

So how much will this help consumers?

It depends, according to Greg McDaniels, the chief financial analyst for Bankrate, a financial services company. He claims that, although it will help many, if you have very good credit score or very bad credit score, the changes won’t make that big of a difference. As for people with little or no to credit history, McDaniels says, the effects remain to be seen.

But for those consumers with medical debt or a paid collection dragging their credit scores down, they could see a bump of as much as 25 points. And 25 points can often be the difference between an approval or a denial – as well as saving consumers thousands of dollars over the life of a loan, as higher credit scores typically translate into lower interest rates. Nationwide, the savings on lower interest rates with the new credit scores could be in the billions.

According to a study by the Urban Institute, 35 percent of Americans have debts and unpaid bills reported to collection agencies.

The newer FICO scores will be available this fall.

[Image Via ABC News]