The 411 on FICO’s Credit Score Changes

Most people understand the importance of establishing and maintaining a good credit score.  For student loan borrowers, this means treating that debt responsibly – for example, paying on time, every time.  But that’s old news.

The new news is that FICO is making changes to the way it calculates credit scores. Because FICO’s credit scoring metric is by far the most widely used in consumer lending decisions, it’s worth exploring what this might mean for you.

What are the upcoming changes?
There are three major changes coming with the rollout of the new FICO Score 9 this year.

First, it will give less weight to unpaid medical debt and medical debt that has gone to collection. According to the Federal Reserve, medical bills result in over half of the debt-collection activity on consumer credit reports. The Consumer Financial Protection Bureau (CFPB), which advocated the changes to the FICO metric, argues that having this kind of debt doesn’t necessarily make someone a more high-risk borrower. For example, the claim may be in dispute, or the person may be unaware that his or her insurance agency hasn’t paid the bill.

FICO is also planning to adjust its method for assessing so-called “thin file” consumers. These are people with little or no established credit history, which can make lenders cautious to extend credit to them (think new grads and/or less experienced borrowers here). FICO data researchers have established a more comprehensive method of determining the risk involved in thin file cases, so that they can increase lender confidence and help these consumers gain traction and establish positive credit history.

Finally, debts that are resolved in collection will no longer detract from a person’s credit score. This is huge, as debts of any kind that were sent to collection have historically remained on a consumer’s credit report for up to seven years – even if it was paid in full! Collections, even for small infractions, had the power to affect credit scores as much as foreclosures and bankruptcies.  Not anymore.

When will these changes take effect?
FICO Score 9 will be made available to bureaus this fall and lenders later in the year.  However, lenders are not required to use it.  Those that do adopt Score 9 will likely take their time in doing so – before switching to a new version of a score, many lenders will do their own validations to see how it impacts approval rates and other important areas.

Why is FICO making these changes?
The short answer is that the changes are intended to boost lending without increasing risk to lenders.  Since the recession it’s been difficult for anybody without an established positive credit history to borrow at a reasonable rate.  By offering a more comprehensive assessment of the borrower’s potential consumer behavior, FICO’s changes will ideally increase lender confidence in some borrowers, allowing them to qualify for loans that would have previously been unavailable – and potentially even get better interest rates.

Will the changes affect my credit score?
It depends. If you fall into one of the three categories targeted by the upcoming changes (medical debt, “thin file” or debt paid in collections), then you can probably expect to see a change in your score — and it will likely be a positive one. In fact, if the only major ding on your credit report is unpaid medical debt, under Score 9 FICO says it expects your credit rating to go up about 25 points, which can translate to significant savings. And if you don’t have much credit history, this could make it easier to get a loan.

If, however, you already have excellent credit – or if you have very poor credit – you probably won’t see a significant change as lenders adopt FICO Score 9.

Bottom Line?
It’s important to be aware of the factors that affect your credit score, and with the rollout of FICO Score 9 those factors could be changing. For some, it could eventually get brighter on the borrowing horizon.