Tuesday, August 12, 2014

FICO's new Score 9 is a win-win for credit reporting accuracy, consumers with medical debt.

This week, the credit reporting giant FICO reported they’re rolling out an update to their scoring model, FICO Score 9.  Once implemented, it will provide a more accurate and fair way to gauge consumer collections for credit scoring.  The highlight of FICO Score 9 is that it will differentiate medical collections from other consumer credit accounts in collections.  Up until now, those two types of accounts were lumped in together once they hit collections – hurting credit scores the same way.  But with a reported 46 million Americans without health insurance and up to two thirds of bankruptcies caused by unpaid medical bills according to the American Journal of Medicine, a change to the way FICO reported and scored those debts was sorely needed. 

Of course the credit company has a goal of assessing and predicting risk of consumer default for future lenders, and unpaid or overdue medical bills have little real-life correlation to default on other consumer debts.  FICO Score 9 will treat them differently, so a consumer’s score won’t be affected as negatively just from medical bills in collections – better representing the accurate risk. 

While more than a third of Americans have at least debt in collections on their credit file according to a study by the Urban Institute, FICO believes the new model will be able to gauge degrees of risk instead of treating all collections the same.

How much will these changes help or hurt a consumer’s score?  If someone had a clean credit profile except for one major medical debt in collections, their score would increase by an estimated 25 points once FICO Score 9 is implemented.  The changes will be widespread, as FICO is the preeminent credit scoring model in the U.S.  90% of consumer lending decisions take FICO scores into account, with 25 of the largest credit card companies, 25 of the largest auto lenders, and tens of thousands of other businesses looking to them for consumer risk assessment and federal compliance.  
“FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently,” said Jim Wehmann, Executive VP at FICO.

The downside?  It will take a while for FICO Score 9 to be implemented – maybe even a couple years, as software and systems are updated.  Also, Fannie Mae and Freddie Mac haven’t adopted this new scoring model as of yet, so the scoring changes won’t benefit consumer lending. 


If you have significant medical bills, accounts in collections, or any questions about FICO Score 9 and your credit score, feel free to contact us for a no-risk consultation.  It could save you big money!

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