Fair Isaac Corporation, commonly known as FICO, recently announced significant changes to its metric for determining consumer credit scores. The upcoming FICO changes, brought in by the new “FICO Score 9” is a nuanced way to assess consumer debt information by:
- Changing the way paid collection accounts are reported, and
- By differentiating between medical and non-medical collection accounts.
Currently, FICO reports collection accounts for seven years even if they have been paid in full. Under the changed model, consumers will see their paid collection accounts removed from their credit reports. The Wall Street Journal reports:
Of the 106.5 million consumers with a collection on their report, 9.4 million had no balance—and won't be penalized under the new credit-score system.
That's a significant amount of people who might soon be able to get financing who before were denied for a major loan.
Collection accounts due to unpaid medical debt will also not be factored as heavily as non-medical collection accounts. Direct from FICO:
"The median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points."
With a possible increase of 25 points for consumers whose credit score’s only major black mark are unpaid medical bills, that's another group of Americans who might soon be able to secure a mortgage who otherwise were unable.
Finally, for those without much of a credit history, FICO stated that it will focus on a broader picture, instead of simply focusing on paid vs. unpaid debt.
National Association of Realtors President, Steve Brown, reacted positively to the news, stating that “Realtors welcome the announcement from FICO that it will no longer penalize borrowers for certain debt-collection activities when calculating credit scores.” Overly restrictive lending has been the greatest obstacle to home ownership since the housing crash. Home ownership that once seemed unattainable may soon be within reach for many Americans who have not been able to secure lending due to flawed credit scores. Brown said the NAR will continue to support these efforts to increase access to credit for qualified home buyers.
With the new scoring system taking effect this fall, many consumers who have been denied lending in the past may become qualified to purchase a home.