FICO Score 9, as it's been named, will be released to the three major credit bureaus this month. After testing and validating the new score, the credit bureaus will make it available to lenders later this year. Lenders must decide when they will begin using it.
The changes are expected to increase the number of people approved for loans, especially those shut out of the credit market due to medical debt sent to collection agencies. FICO representatives said consumers whose only major flaw on their credit reports is medical debt collections will see their scores increase by a median 25 points.
More than 64 million consumers in the U.S. have medical debt collections on their reports, according to credit reporting agency
"In developing FICO Score 9, we were able for the first time to look at medical debt collections data separately from all debt collections," said
"Now that we can do that, we have found that consumers with a medical debt collections being the only negative item in their credit history are not a greater credit risk."
Medical debt is treated differently because consumers often do not know they have a medical debt that has gone into collections until after it has been reported to a credit bureau. Also, medical costs are often due to unexpected illnesses and accidents, so medical collections are not considered as negative for a person's payment history as a regular unpaid debt.
Debt collections stay on a person's credit report for as long as seven years even if the debt has been paid off. The new FICO score, however, will not penalize the consumer for having a debt in collections as long as it's been paid or settled.
FICO unveiled its new scoring techniques on the heels of a scathing report earlier this year from the
The three-digit credit scores compiled by credit bureaus play a significant role in everyday life because most lenders use the scores to decide whether or not to grant credit and at what interest rate. When overdue debt goes to a collection agency and ends up on a credit report, it reduces a person's score and makes lenders more cautious about granting credit because the borrower is perceived to be more risky.
While FICO scores range from 300 to 850, most credit scores fall between 600 and 750, according to
The average balance for households that have credit card debt is
With about 90 percent of lenders using FICO scores to make credit decisions, Fair Issac is the leading credit scoring agency in the U.S. But the company has competitors that have led the way in adapting scoring methodologies that determine credit risk.
VantageScore Solutions, a
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