Some 64.3 million U.S. consumers who have at least one medical
debt on their credit report woke up to a healthy dose of good
news on Friday that the Fair Isaac Corp. (
) - which lenders use in 90 percent of their consumer and
mortgage lending decisions - will penalize them less for their
unpaid medical bills.
FICO further announced that it will stop including in its FICO
credit-score calculations any record of a consumer failing to pay
a bill if the bill has been paid or settled with a collection
Why this is good news
The new FICO score rules will likely boost the credit scores for
millions of Americans, giving them greater access to a wider
range of loans, at a reduced interest rate.
"It's been a long time coming," said Ted Rood, a national
mortgage lender based out of St. Louis, Mo. "This is going to be
a game changer!"
"It's wonderful, wonderful news," said Gina Dale, a loan
officer with Centrue Bank in Plano, Il. "So many more people will
now be able to qualify for loans."
The new scoring model will likely be implemented by credit
card and auto lenders first. Mortgages typically lag in adopting
new scoring models.
Nevertheless, the new FICO score rules are set to ease access
to borrowing for millions of consumers. Currently, collections
can impact credit scores as much as foreclosures or bankruptcies
do and stay on credit reports for seven years, even if a borrower
has paid off that balance and remained current on other
Why the change?
The relaxing of standards has been driven by multiple studies,
including FICO's own, showing that an
unresolved medical debt
caused by a medical emergency, was not as serious or negative as
a regular unpaid collection.
In another study based on 5 million anonymous credit records,
the Consumer Finance Protection Bureau in May criticized
credit-scoring models for applying too much weight to unpaid
Action was further prompted by the sharp increase in the
number of Americans struggling with medical debt, which rose from
58 million in 2005 to 75 million people in 2012, or 41 percent of
U.S. adults, the Commonwealth Fund stated in a report last
In announcing a loosening of its standards, FICO made it clear
it was not overstating the creditworthiness of borrowers. Rather,
it believes the new standards will more accurately reflect a
and provide lenders with greater precision in their
loan-making decisions. According to FICO, the median FICO score
for consumers whose only major derogatory references are unpaid
medical debts is expected to increase by 25 points.
Who else will benefit?
Consumers won't be the only winners under the new model. FICO's
changes should also boost the sagging loan portfolios of lenders.
With the new scoring changes, more Americans will be using
mortgage calculators to calculate their mortgage payments.
FICO Score 9 uses a more refined treatment of consumers with a
limited credit history and those with accounts at
, so that lenders can grow their credit and loan portfolios more
confidently," said Jim Wehmann, a FICO executive vice
FICO's new more lenient model should also benefit collection
agencies. Consumers with unpaid medical debts now have an
incentive to settle, knowing that FICO will stop including in its
calculations any record of a consumer failing to pay a bill, if
the bill has been paid or settled with a collection agency.
"This is great news for collection agencies," Rood said. "It
provides laggards with an incentive to pay up. Before these
changes, you were incentivized not to pay off your debt. The last
thing you wanted to do was trigger a new 'date of last activity'
report for an old debt, say, a debt from 2008. Again, you were
just better off not paying it because older debts weighed less
heavily against you on your credit report than new debt."
Amir Erez with Cedar Financial, a Calabasas, Calif.,
collection agency, doubts, however, that FICO's new calculations
will motivate deadbeats to pay up.
"I haven't had enough time to really digest the news," Erez
said, "so at this point I remain very cautious. The reality is if
you have a big debt to pay, you're probably still not going to
pay it unless you're forced into litigation."
FICO's announcement also piggybacks on news out of the
earlier in the week that one in four U.S. banks had eased
mortgage standards for borrowers with strong credit during the
second quarter of 2014, the largest positive swing since
In late July, Wells Fargo & Co., the nation's largest
mortgage lender, also began lowering the minimum credit scores on
its fixed rate jumbo mortgages to 700 from 720, another sign of
Millions of Americans will still find themselves ailing from
unpaid or unresolved medical debts, but in the wake of the new
FICO score rules and credit belt-loosening by some of the
nation's leading lenders, the pain may have subsided slightly
while renewing the hope and possibility of credit access for
millions of others.
This article originally appeared on
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