Is your credit score about to change? Credit-scoring company FICO has announced a major change in the way it calculates consumer credit scores. It’s a change that could cause the credit scores of millions of Americans to go up!
FICO’s credit-scoring systems are widely used by mortgage companies, banks and credit card issuers to evaluate borrowers. These credit scores help financial institutions determine whether to approve a loan or credit card application and what interest rate to charge. (Generally, the higher your credit score, the lower your interest rate will be on a variety of types of loans, including mortgages.) The new credit-scoring model, known as FICO 9, has two major differences from the company’s previous FICO 8 model. They are:
Medical debt is less of a factor in your credit score: The new model for the first time differentiates between medical and non-medical debt. Unpaid medical bills will no longer be as much of a factor in an individual’s credit score. In the past, people with significant amounts of medical debt saw their credit score affected in an extremely negative way. A Consumer Financial Protection Bureau (CFPB) report in May 2014 showed millions of Americans’ credit scores were “overly penalized” because of medical debt.
There’s now a benefit to paying off a bill in collections. Paid collection accounts will no longer count against consumers. It’s estimated that nearly 107 million Americans have some type of collection account that affects their credit score. Of those, nearly 10 million have a collection account that they’ve paid off, but their credit score is still being penalized. Many of those consumers should see their scores go up. The bottom line: In the past, there wasn’t any real benefit to paying off a bill that had ended up in collections. Now there is.
Will your credit score increase in the coming weeks as the new rules go into effect? If you have unpaid medical debt and/or paid collection accounts, it’s worth checking into! Even if you aren’t affected by the changes, always remember that paying bills on time, keeping credit card balances low and watching how much credit you apply for all go a long way to keeping your credit score healthy.