Why the New FICO Scoring System May Not Raise Your Credit Score

FICO makes changes to credit scores so medical debt isn't the same as credit card debt
Most consumer advocates reacted positively to the news that the Fair Isaacs Corporation is going to revamp the way they calculate their FICO score so medical debts aren’t going to be viewed on the same level as credit card debts in the calculations. The New FICO Score 9 will make two fundamental changes to the way the score is calculated, and this has the potential to save millions of consumers billions of dollars in interest charges if the new Score is adopted by lenders. The two main changes are:

1. All medical payments which were overdue, but which the consumer has paid in full will will not be taken into account when creating the score.

2. All medical payments which have been sent to debt collectors and have not been paid off will be scored as negative, but much less negatively than overdue credit card debt or other loan payments.

In theory, this is great news for consumers. Millions of people who have had dings in their credit score due to medical bills will see their credit score rise to better reflect their true credit risk. This is exactly what many consumer activists and the Consumer Financial Protection Bureau (CFPB) wanted.

The problem is that while this is good in theory, it may not actually help those consumers in reality for a few big reasons:

Adoption of the Score

While Fair Isaacs will be providing the new credit score, there is nothing that says that lending institutions will actually adopt the new score when making loans. This is why many experts are saying that even though the new score will be available toward the end of this year, consumers may not see the rise in their score for a year or more. The fact is, they may never see the rise if the lender is pulling a different FICO score than the FICO Score 9.

So Many Different FICO Scores

What many people don’t understand is that there isn’t a single FICO score, but over 50 FICO scores which are calculated slightly differently, usually to the benefit of certain industries. That’s to say that the FICO score that a credit card company pulls and the FICO score a mortgage lender pulls won’t be the same score, and both will have been calculated in slightly different ways. Unless the institution which pulls your credit score uses this newest one, the changes won’t necessarily be reflected in the score the lender receives.

Lenders Have Become More Sophisticated

For many lenders, the credit score is only a small piece of the puzzle when deciding whether or not to lend money to a consumer. In fact, some of them have already caught onto the fact that medical debt isn’t the same as credit card debt and have taken that into account when looking at a person’s credit report. For those who have already taken this into consideration, there won’t be a change in the interest rates offered to consumers just because the credit score is a bit higher than it was before.

Credit scores are important, so the change is good news for consumers. That being said, the change may not have as big an impact as many assume it will due to the above reasons. The good news is that it’s out there and lenders have to now make the decision as to whether they believe medical debt is fundamentally different than other types of debt when looking at lending risk, something they may not have considered in the past.

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One Response to Why the New FICO Scoring System May Not Raise Your Credit Score

  1. faith says:

    Dave Ramsey says that you don’t need to worry about your credit score, so none of this is important to anyone. Follow Dave’s advice and you will be fine. Don’t worry about your debt score and these blood sucking companies that want you to get more and more debt. Live debt free and you’ll be fine.

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