Why Credit Scores May Be About to Go Up: It’s the New YouDakin Campbell
A change in how the most-widely used credit score is calculated will reduce the importance of overdue medical bills and remove blemishes on once late, paid-off accounts.
The adjustments are expected to raise the median score for consumers whose only major delinquency is an unpaid medical bill by 25 points, according to an Aug. 7 statement from San Jose-based FICO, formerly known as the Fair Issac Corp. The updated scoring system is intended to better capture more recent behavior and will be available later this year, the company said.
One in four U.S. families struggled to pay medical bills in 2012 and 10 percent said they had costs they couldn’t pay at all, the National Center for Health Statistics at the U.S. Centers for Disease Control and Prevention said in January. Among families in which all members were insured, 21 percent still had difficulty paying medical expenses, the agency’s survey found.
“This will increase the credit scores of many, some substantially,” Judith Fox, a professor of law at the University of Notre Dame and the director of the law school’s Economic Justice Clinic, said in an e-mailed statement. “For those consumers, credit will be easier to obtain.”
FICO scores are the most widely used credit-scoring formula in the U.S. and are taken into account in lending decisions such as issuing credit cards or setting interest rates on home loans. The updates are intended to give a better picture of consumers’ financial health so lenders can feel more confident expanding credit, the company said.
A Consumer Financial Protection Bureau study found that some credit scoring models may overly penalize individuals because of medical debt, said Moira Vahey, an agency spokeswoman.
“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,” Vahey said in a statement.
Among U.S. consumer lending decisions, 90 percent use FICO’s score, according to the company.