Personal credit score provider FICO has announced that it is going to launch a new model for credit scoring which will offer the consumers to assess the collection information in a better way.
FICO, a creator of one of the most widely used credit scores, said that the new credit score model will encourage the credit ratings of borrowers and help the lenders to better assess risk.
The company also said that under its latest credit score version medical debts would no longer be weighed as stringently as it was carried in previous iterations.
According to a FICO statement, the credit score changes will weigh medical debt less heavily than unpaid credit card debt and other collection information.
A Wall Street Journal report also said that under its latest version the credit score provider will not be considering previous overdue bills that have been already paid by the borrowers.
“Lenders can avail the new scores through the US credit reporting agencies starting this fall,” FICO said.
The development comes after the 2014 report issued by the US Consumer Financial Protection Bureau (CFPB) said that credit scores excessively penalize consumers with medical debt in comparison to other forms of debt.
“Given the critical role that credit scores play in consumers’ lives, we welcome steps by industry to adjust how it weighs medical debt in order to be as precise as possible in predicting the creditworthiness of a consumer,” a CFPB spokesman said on Friday.
John Ulzheimer, a credit expert and a former FICO employee, said that FICO’s new scoring model will help in identifying risky borrowers and also facilitate the sub-prime lenders to lessen their risk of engaging in business with such borrowers in a better way.
“I’m not exactly sure what impact this is going to have on sub-prime lenders, because for the score to be meaningful to the customers, the lenders have to actually start using that score,” Ulzheimer added.
FICO, which claims that its brand of scores is used by 90 percent American lenders, said that its new model also discount overdue medical payments and improve the median score by 25 points for individuals with unpaid medical debts.
Under the new scoring system, if a consumer has a median score of 711 and clean credit history but has unpaid medical debts then he/she is likely to see their FICO score rise by 25 points. This will lead to consumers mostly qualifying for more handsome interest rates on various loans. This in turn will result in raising the savings by u thousands of dollars.
“It probably doesn’t mean the difference between an approval and a denial, but it can mean the difference in a more advantageous rate,” said Ulzheimer.
According to the Federal Reserve, medical debt represents about half of the total debts going to collections in the US.
A latest Urban Institute study said more than a third of Americans have had a collections agency after them. Their number is about 64 million, says Wall Street Journal report, citing Experian, another credit-rating group.