A new version of FICO's credit score formula will raise the
scores of people with medical debts, or who paid off other debts in
But people with unpaid debts on their record that aren't related
to health care would see their scores fall, making it harder for
them to get a personal loan or credit card, or raising the interest
rates they'll have to pay, FICO said.
The changes potentially affect tens of millions of people -- but
don't expect big changes in your credit right away. The score is
expected to be available to lenders around the end of this year.
And lenders typically take months to try out new scoring formulas
on their loan portfolios, to see how accurately the new scores
predict problem loans.
"They don't just flip a switch," said Rod Griffin, director of
consumer education at Experian. "They're going to want to test the
Bank of America, for example, "will evaluate the benefits of the
new FICO model," BofA spokeswoman Betty Riess said in an email
response to questions. "When we look at credit requests, we take
into account a number of factors, including our internal customer
FICO's new formula
FICO, the source of the score used by most lenders, said Thursday
that it is rolling out a new formula called
FICO Score 9
. The new score will drop collection agency accounts that are paid
off, whether paid in full or settled, FICO spokesman Anthony
Sprauve said. It will also differentiate medical debt from other
types of unpaid debt.
Under the new formula, the typical credit score of 711 should
rise 25 points for people with medical debts but no other serious
demerits on their credit record, Sprauve said. Of all accounts in
collections, only about 10 percent are paid off, he said.
Consumer advocates applauded the change -- one they have pushed
for years -- as bringing more fairness to lending decisions. Debt
in collection affects a broad swath of U.S. consumers. About 77
million people in the U.S. have some debt in collection on their
credit report, according to a
by the Urban Institute and the research arm of debt buyer Encore
"It's definitely good news -- about half of the negatives on
consumers' credit reports are from medical debt," said Chi Chi Wu,
staff attorney at the National Consumer Law Center. Medical debt
frequently winds up in collections because of insurance billing
problems, not because the consumer can't pay, she said.
Health care bills are the most common type of debt in
collection, representing about 38 percent of total debt collected,
according to a survey by the collection industry group ACA
Medical debts injure scores
In May the U.S. Consumer Financial Protection Bureau released a
study that found people with
medical debts were overpenalized
on their credit scores, based on their overall debt payment record.
For people with paid-off medical debts, the penalty amounted to
credit scores 16 points to 22 points lower than people with similar
repayment histories, the agency found.
By the same token, people whose unpaid debts were nonmedical
benefited from higher scores than their repayment history
warranted, the study found. FICO representative Anthony Sprauve
said that FICO 9 will result in some reduction of scores for people
whose unpaid debts are nonmedical debts, but no estimate of the
size of the reduction was available.
While FICO can make a new formula available, it is up to lenders
to use it to evaluate loan applicants. The FICO 8 formula was
announced in 2009, and in 2010 FICO said that 2,700 lenders were
using the new formula. But it wasn't until mid-2011 that it
announced a major credit card issuer -- Citi -- had
adopted the new formula
, saying the card business had evaluated the new formula for 18
months. Griffin of Experian said some lenders continue to use early
scoring models back to FICO 2 and 3.
"We hope the fact that the CFPB did their own research very
rigorously will help convince lenders to adopt this," Wu said.
However, she noted that Fannie Mae and Freddie Mac, the major
players in the mortgage market, use an older FICO scoring formula,
so many mortgage applicants might not see a change in how their
credit measures up.
FICO scores -- which range from 350 to 850 -- are calculated
using the payment information on credit reports kept by the three
major credit bureaus, Equifax, Experian and TransUnion. Different
versions of the formula are available for car loans, credit cards
and other types of consumer loans. More than 200 different scores
are available from analytics companies that use Experian data,
Griffin said. FICO, formerly Fair Isaac Co., says its scores are
used in 90 percent of lending decisions.
VantageScore, a competitor formed by the major credit bureaus,
said its current 3.0 model excludes paid collections. However,
unpaid medical debt does weigh against a consumer's score.
As consumer behavior changes, credit scores have to adapt,
Griffin said. Since the recession of 2009, credit card balances
have fallen substantially and delinquencies on consumer loans have
plunged, marking changes in consumers' risk levels. "What may have
been an indicator of risk isn't any longer, or isn't as strong," he
said, "because people's behavior has changed."
See earlier coverage:
Long-awaited credit scoring revisions unveiled
Congress considers relief for credit damage from