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FICO Changes = Higher Credit Scores for Consumers

FICO Changes = Higher Credit Scores for Consumers

Fair Isaac Corp. will soon change their FICO scoring algorithm used in determining a person’s credit scores. It should result in higher credit scores for many consumers. FICO calls their new scoring method FICO Score 9. This method will no longer grade medical collections as harshly and it will not factor in any paid or settled consumer collection accounts in credit scores at all.

What is FICO?

FICO is the credit scoring algorithm created by Fair Issac Corp. It only uses information reported to the three major credit bureaus to grade a consumers credit worthiness. According to myfico.com, a FICO Score estimates the “level of future credit risk” of a consumer.

Consumers have three FICO Credit Scores – one for each of the three main credit bureaus (Equifax, Experian, and TransUnion). Each bureau uses the information reported to them when determining their FICO score. So while each bureau uses the same FICO scoring algorithm, the scores can differ because not every creditor or lender reports to all three bureaus.

FICO Score 9, once released, should result in higher scores for many consumers thanks to two major changes in how they will grade collection accounts.

Medical Collections

Open medical collections will no longer negatively affect your credit score as much as they do now. They will no longer be counted the same as other open consumer collection accounts.

Most major lenders have long overlooked medical collections, knowing that they do not give a true indication of a consumer’s ability to re-pay debt. An applicant who is ill-prepared to pay for a sudden major medical debt, for example, should not be graded as harshly as one that walked away from consumer debt that they had promised to pay.

Still, these collections can have a major negative impact on credit scores. And lenders are still very credit score driven. Lower scores due to medical collections can lead to higher rates, higher fees, and even loan denials.

The upcoming changes in FICO scoring will finally acknowledge what lenders have known for years; that medical collections do not represent a borrowers true ability to re-pay debt. Thankfully, credit scores will no longer suffer once these changes take effect. In fact, FICO claims that consumers can see as much as a 25 point increase in their score!

Paid/Settled Consumer Collections

As of right now, if you have older collection accounts that have been paid in full or satisfied, they can still negatively affect your credit scores for years, even though they report as being satisfied or paid.

But after FICO Score 9 takes effect, these paid/satisfied collection accounts will be dropped from your credit report altogether. They will no longer have a negative impact on your FICO scores. In other words, the new FICO scoring method will continue to count open or unpaid collections against a consumer’s score, but it will reward them by removing the collection account once it is paid or settled.

Who Benefits?

These two major changes in the FICO scoring method should open doors for a lot of consumers who will realize higher credit scores as a result. It can equate to lower rates, lower fees, and even loan approvals instead of denials. It also benefits lenders by providing a more accurate assessment of a consumer’s ability to re-pay debt.

There is no exact date for the FICO 9 Score release, but rumor has it that it will happen sometime in the Fall, 2014.

Please do not hesitate to call one of our Personal Advisers for more information. We look forward to hearing from you soon.