Consumers who’ve had credit challenges due to medical debt will soon be getting some relief.
Fair Isaac Corporation, creator of the FICO score, the most widely-used and influential credit scoring system, recently announced a new version of its credit scoring system which will differ substantially from prior versions.
Dubbed FICO Score 9, the new version is expected to raise credit scores for millions of consumers, as well as increase the number of consumers eligible for today’s lowest mortgage rates.
Higher credit scores are linked to lower mortgage rates.
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FICO Scores To Get A Boost With FICO Score 9
“FICO” is a brand name, but much like “Kleenex” and “Band-Aid”, it has come to represent a class of products. When a person refers to your FICO, they’re referring to your credit scores.
Credit scores range from 350 to 850; and are meant to predict the likelihood of a person going into default on a loan. In general, a loan defaults after 90 days of non-payment.
To build your credit score, credit bureaus use debt information made available by creditors to the three major bureaus — Equifax, TransUnion, and Experian. The FICO Score 9, though, is expected to raise the FICO model’s scores because, in part, overdue medical payments will be given less attention than in prior versions.
FICO scores are used in 90% of all lending decisions and this is why the introduction of FICO Score 9 is potentially such a big deal.
Mortgage lenders typically use the middle of your three reported credit scores to determine your eligibility and mortgage rates, which means that, with FICO Score 9, borrowers will likely get approved more often, and with lower mortgage rates.
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How Much Will Scores Rise With FICO Score 9?
Earlier this year, a government watchdog group released a report stating that millions of consumers’ credit scores have been “over penalized” by medical debts in collection; and a recent Federal Reserve study which showed that nearly half of all consumer debt on a typical credit report is linked to unpaid medical expenses.
Furthermore, the Fed report showed, many of these medical costs have been billed incorrectly.
Derogatory items in person’s credit history can negatively affect a credit score by 100 points or more. For potential home buyers and homeowners looking to refinance, a drop of 100 points can be the difference between a low mortgage rate and a high one; or a mortgage approval and a denial.
The current FICO model — FICO 8 — makes no distinction between unpaid medical and non-medical bills; nor, between paid and unpaid accounts in collection. The FICO Score 9 model was developed, in part, to address these issues.
Changes Included In FICO Score 9?
FICO Score 9 will become available to the three national credit bureaus this fall. The major bureaus will evaluate it, then release it to mortgage lenders later in the year.
The main changes in the FICO Score 9 model are:
- Medical debts in collection which are repaid in full will be ignored and not lower a person’s FICO score
- Overdue medical payments will “count less” against a FICO score
- New techniques will be applying to analyze consumer creditworthiness for people with “thin” credit histories
The credit bureaus expect FICO scores to rise at least 25 points for many of today’s borrowers, although some consumers may see credit score improvement which far exceeds just twenty-five points.
Note, however, that the FICO Score 9 may not be used for mortgage approvals for some time, or maybe ever. Lenders are expected to give the model a thorough workout to determine how accurately it predict problematic loans.
If the model predicts credit default better than FICO Score 8 and other prior models, it will be adopted industry-wide. Otherwise, it won’t.
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Today’s mortgage rates are at their best levels of 2014. Regardless of your credit score, current rates are as low as they’ve been since June of last year. It’s a good time to comparison shop loans, and to apply for a mortgage.
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