FICO credit-scoring
system is being revised to reduce the negative effect of overdue medical bills
and to quit penalizing consumers who pay off debts that had been assigned to
collection agencies. The changes to the hugely influential FICO scoring system
could make it easier for millions of Americans to get loans at lower rates and
eventually save consumers billions of dollars.
For
consumers whose only major delinquency is an unpaid medical bill, the changes
would increase a credit score by 25 points, according to Fair Isaacs Corp.,
whose FICO credit ratings are the basis for scores published by the three big
credit-rating agencies.
The
revised system, called FICO Score 9, will be made available to lenders through
the three major credit-rating agencies starting this fall, Fair Isaacs said.
The San Jose-based company said the improved scoring methods also would help
lenders do a better job of assessing the risk of consumers with limited credit
histories.
The
changes, released Thursday, address a major point of contention between FICO
and consumer advocates, who complained that medical patients frequently are
left in the dark when insurers reject payment on a bill, which can then go to
collection. A Consumer Financial Protection Bureau study this summer found that
both paid and unpaid medical debts unfairly penalized a consumer’s credit
rating. These new changes have the potential to save consumers billions of
dollars, noting that 64 million Americans have a medical collection item on
their credit reports.
Since
the housing crash, overly restrictive lending has been the greatest obstacle to
homeownership. The National Assn. of Realtors applauded the changes, saying
they would “ultimately make a real difference in the lives of millions of
Americans” who have been shut out of the housing market or forced to pay higher
mortgage interest rates “because of flawed credit scores.”
Though
the changes are a victory for the consumer bureau, the agency needs to keep
close watch on how the new rules are put into effect. Just because FICO says that someone is low
risk does not mean a bank will treat them as such. There is a real risk that
banks use the score only to accept new people, not to lower rates on customers
with demonstrably lower risk.
Lenders
will not quickly overhaul their systems to evaluate consumers and price loans
for them. Banks likely will take a year to 18 months to analyze the effects of
the new scoring on their loans and set up new pricing strategies. Borrowers
might have to wait for a year or more to see any change and improvement won’t
be automatic.
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