You’ve probably heard the recent buzz about the new scoring model being released this fall by Fair Isaac Corp.(FICO).
This new credit scoring model, FICO 09, will change the way paid collection agency accounts, unpaid medical bills and even other non-medical collection accounts impact a borrower’s credit score. As a result of these changes, some borrowers could see a median score increase of 25 points.
3 IMPORTANT THINGS TO KNOW ABOUT FICO 09
- Debts that go to collections agencies and get repaid WILL NOT count against a consumer’s FICO score.
- Medical debts will have a smaller effect on the score and paid medical debts will have no effect at all! If your only major bad mark comes from unpaid medical debts, FICO says it expects your credit score to go up by 25 points.
- A technique will be used to analyze people’s creditworthiness if they don’t have much of a credit history.
Why are the changes happening?
Regulators have focused on health care debts. In May the Consumer Financial Protection Bureau, a government agency, said consumers may be penalized too harshly for medical debt. The CFPB said medical bills are different from some other types of debts because they can be more expensive, unpredictable and caused by disputes between medical providers and insurers instead of bills consumers simply didn’t pay.
The CFPB said that consumers who owe medical debt may have their credit scores underestimated by about 10 points.
Who will be most affected?
Greg McBride, chief financial analyst for financial services company Bankrate, says the change will help many consumers, but it won’t make a big difference if you already have bad credit or very good credit. For consumers with medical debt, this could be the difference between a decent score of around 675 and a good one around 700, or a good score and a great one around 725.
According to a study by the Urban Institute, 35 percent of Americans have debts and unpaid bills reported to collection agencies. The Association of Credit and Collection Professionals says health care-related bills account for about 38 percent of debt that gets collected.
What does this mean to lenders?
In theory these changes are great for the consumer, but unfortunately a borrower may never see the benefits from this scoring model if it isn’t accepted by Fannie Mae and Freddie Mac. Right now they are very specific in the scoring models they will accept. When FICO 08 was released they never adopted it. The only scoring models Fannie and Freddie will accept are:
- Experian Fair Isaac Version 2
- Trans Union Classic 04
- Equifax Beacon 05
The Elephant in the Room?
As most of us know, the mortgage lending market changes slowly. Adoption of this new scoring version in the mortgage industry will take some time, possibly years. Many lenders are still using FICO score models that are two versions behind the most current versions available. Expect lenders who are interested in FICO 9 to begin testing it to ensure it works better than the current model they have in place. Once this is done, we should see more lenders update their risk-assessment processes to include a new scoring version.