The Fair Isaac Corporation that first introduced its FICO credit-scoring model in 1989 is making big changes that will potentially affect borrowers across the nation. The company’s credit scoring methodologies used in 90 percent of all credit decisions made by banks, credit unions, retailers and mortgage companies is about to change. This shift in the way Fair Isaac calculates credit scores will no longer take certain factors into consideration and lessen the effects of others.
Three New Changes
In a statement released this week by FICO, major changes in the company’s scoring methodology will soon take effect. For starters, unpaid medical bills will no longer carry the weight they once did for consumers. “Oftentimes medical collection happens because of miscommunication between a consumer and their provider, or a consumer and the insurance company”, says FICO senior consumer credit specialist Anthony Sprauve.
“What we found through research was that it wasn’t an indicator that someone was in trouble and was becoming a higher risk to lend to.” This could potentially have a tremendous impact on credit scores as medical debt traditionally carried by about 7 percent of consumers could drag credit scores down an estimated 25 points or more. “We recognize that it’s not an indicator of a person struggling in most cases when it’s happening by itself,” reiterates Sprauve.
Additionally, those who satisfy debt through collection agencies will no longer be penalized in their credit scores according to the corporation as well. Lastly, the leader in credit scoring products intends to adjust its model for evaluating those with little or no credit profile. Historically, younger consumers and those who’ve primarily paid cash for such things as autos and appliances have scored low on the FICO scale, making it difficult and expensive to get mortgages and credit cards later. Stricter mortgage lending standards imposed after the major housing bust have also made it harder to qualify for many first time homebuyers. FICO’s new scoring methods may change all that in a few short weeks.
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