FICO Score Changes Could Help Millions of Americans

Poor Credit Score concept displayed on a gauge
Izel Photography RF/Alamy
Two months ago, I sat across a table from a woman on the verge of tears. As she clenched her jaw and cast her eyes towards the ground, she disclosed her overwhelming financial situation. An unexpected medical expense depleted her savings and sent her into a downward spiral of financial problems complete with collections agencies pestering her for payment. Even though she paid her other bills on time, avoided consumer debt and worked two jobs to support her family while trying to pay off her medical bills, she felt bankruptcy was the only way out.

Unfortunately, her story is familiar to many other hard-working, responsible Americans around the country. An unexpected medical expense can quickly send the most diligent and responsible people into dire financial straits. Those unpaid debts go to collections, causing a major hit on a credit report and score. Once a person's score drastically drops, it becomes hard to get a loan to refinance debt without a staggeringly high interest rate.

As of July, about 64.3 million consumers in the U.S. had a medical collection on their credit report, according to data from credit bureau Experian (EXPN), and a hope is on the horizon for them.

FICO (FICO) –- the company behind credit scores -– on Thursday announced an unprecedented change to its scoring model: FICO Score 9 will change the way in which paid collection agency accounts, unpaid medical bills and non-medical bills impact a score.

What Are the Changes?

Under the current model, a collection generally stays on a credit report for seven years -– even if it is paid off. This is the same amount of time bankruptcies and foreclosures stay on a report. Now, consumers will see their paid collections being removed from their credit reports.

According to The Wall Street Journal, of the 106.5 million consumers with a collection on their report, 9.4 million had no balance. Those 9.4 million American won't be penalized under the new credit-score system.

Unpaid medical bills will now carry lower weight compared to non-medical debt going to collections.

"The median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points," according to FICO's release on the new model.

FICO also said it will refine the way in which consumers with "thin files" or minimal credit history are judged. Instead of solely focusing on paid or unpaid bills, the company wrote in the release, it has quantified the various degrees of a consumer's payment history.

Why Does This Matter?

In May, the Consumer Finance Production Bureau released a report questioning the legitimacy of using medical collections as proof of a consumers' trustworthiness.

In one example, the bureau pointed to consumers who are unaware of unpaid medical collections because they believed insurance had covered a co-pay or bill. If a consumer doesn't know a collection action has even been taken, he shouldn't be penalized on his credit score, especially if the small collection is immediately paid off.

According to its analysis, the CFPB determined consumers with more paid than unpaid medical collections had delinquency rates comparable to consumers with credit scores approximately 20 points higher. It appears FICO took heed of the CFPB's analysis and decided to stop penalizing consumers with unpaid medical bills in the same manner it treats non-medical bills in collections.

But Seriously, Why Does This Matter?

It matters because a higher credit score can help a consumer become competitive for loans with lower interest rates -– or competitive for any loan at all (from a credible lender).

This will likely mean millions of Americans struggling to pay down medical debts are going to be eligible to refinance their debt at lower rates and get a better handle on their financial situation.

Perhaps this will also reduce the number of responsible, hard-working Americans who feel their only options to get out from under their medical bills are bankruptcy or seeking money from predatory lenders in the form of payday loans or title loans.

When Will You See the Changes?

It'll take 12 to 18 months to see the changes, according to Nick Clements, co-founder of and a former bank executive with experience implementing new scoring models.

In a post for the site, Clements said a bank first works to understand the impact a new score will have on its existing portfolio, which often will take at least six months. Next, the bank will set up new pricing strategies and prepare its systems for the new scoring model by implementing new rules and analytics. This process often takes six months to a year.

Customers shouldn't expect a call telling them their loans' interest rates have been reduced.

Once FICO 9 is in place, existing bank customers shouldn't expecting a call telling them their loans' interest rates have been reduced. The bank is far more likely to use reduced rates to lure in new customers than to please existing ones. Instead, consumers should take the initiative to shop around their debt and check the rates with other banks, credit unions or personal loan lenders.

Ultimately, FICO's new scoring model should provide a much-needed boost to millions of Americans who fell on hard times and are otherwise fiscally responsible and should be eligible for competitive interest rates on their loans, mortgages and other financial products.

Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She is the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. She is also the brand and content manager for MagnifyMoney.

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George Mercado

I think this change is a great. I manage properties in NYC and you'd be surprised at how many young people come in for an apt and have credit scores that truly don't make sense. I personally don't just look at the number, I look at the reason why. If its medical or EDU, I am very forgiving.
FICO should also start removing State Tax liens that are paid. I believe if something is paid it should be removed within a fair amount of time; not 7 years.

August 15 2014 at 10:02 AM Report abuse rate up rate down Reply

All of this is a complete sham...... where to begin ? FICO themselves, the 3 reporting agencies, the mindboggling assholishness of collection douchebags, and the banks who have dipshits making $ 12.00 per hour determining how "credit worthy" you are to a "bank" What IS a bank anymore ? We need the, why exactly ? Who do YOU know that has been helped by one, w/o a major colonoscopy in the process ??

August 11 2014 at 2:11 PM Report abuse +1 rate up rate down Reply
1 reply to ironcyde's comment

I happen to be one of those "dipshits" making $16/hr thank you, at a credit union, determining your credit worthiness. I don't really appreciate your gross generalizations sir. I was really excited to see this change because I personally think it's BS that I have to deny people for medical collections from when their kid had cancer. Unfortunately, I have to do my job so I can pay my own bills! My husband has some medical collections and our joint auto loan has a staggering 20% APR. We would like to buy a house someday, so this is really good to know! I don't like the way some things are handled in the finance industry, and It sucks that once you've made a mistake it's pretty hard to not get bogged down and fix your situation, but Financial Institutions do have the right to pre-screen their clientele, so that is why we have credit bureaus and FICO scores!

August 28 2014 at 6:53 PM Report abuse rate up rate down Reply

Seems the women in story never bothered to sign up for the ACA that would have avoided this mess os the story is very old and shows what life was like without the ACA.

August 11 2014 at 2:11 AM Report abuse +2 rate up rate down Reply

Holy Cow!!!! Seems like there are many people who are truly concerned about their Credit Scores!!!
I'm glad many of you are. Why? unfortunately, your FICO Score is incredibly important in your ability to borrow money at a good rate, rent a home, and believe it or not, get a job. It's pretty sad that these 4 letters, FICO, effects your life tremendously.
There is GOOD NEWS....I can fix and increase your credit scores by a significant amount.
Send me an email at psmarshall62@gmail. com and leave me your phone number or email and I will get back to you and explain how I can help you get your FICO Score back to a good number so you can get a loan without being ripped off by the banks on interest rates and points.

August 11 2014 at 12:17 AM Report abuse -2 rate up rate down Reply

So let's "weigh" cetain debt diiferently because it's politically-correct to do so. How ridiculous: so people's credit scores will artificially rise, they will borrow more money, and the probability that the outstanding medical debt will be paid is only further diminished. Also, history does matter: 7 years is certainly not excessive in any way when establishing a credit history. But hey, this is the new Obama America where nobody is resposible for anything, and some big corporation must be at fault.

August 10 2014 at 11:09 PM Report abuse -2 rate up rate down Reply

The most important question is -- Do you really need to borrow? Review your needs and then deal with FICO Fiasco.

August 10 2014 at 6:37 PM Report abuse -1 rate up rate down Reply

Now if we could just get employers to stop looking at the credit reports of prospective employees. Many people are judged unfairly by their credit scores.

August 10 2014 at 4:34 PM Report abuse +1 rate up rate down Reply

They are going to remove the paid collection but leave the unpaid original debt on the report .... Not fair fokes

August 10 2014 at 4:33 PM Report abuse +2 rate up rate down Reply

Here is the real deal. Under these new credit rules. The credit report company will remove the paid collection... In return hiding the real fact that you paid the debt. Example. You owe a bank 3k... You get beside on the loan. They sell it to a collection company . The bank reports you as a closed account not paid. They once you pay off the credit collection company it should show paid the bank.. But now they will simply remove the face that you paid it off and leave the bad part of the past due closed account on the report.... So if a banker wants to see if that account was paid that information is no longer in view... Another way the banks and credit reports got you again... Bottom line is this is not a good idea for people.. Please keep in mind that the credit reports only are there to make sure that you are a profitable customer... Not looking out for you interest... They are there to make sure banks make more money,,, lower credit scores... Mean higher interest rates for the banks... The way they should fix this issue is simply showing the truth that if it's a paid account that you are a good person and that you are at a lower risk... But the way they are doing this is only in the banks favor......

August 10 2014 at 4:31 PM Report abuse +1 rate up rate down Reply

Get 'em while their hot- in a few years none of us will have any money any way with the nutty jackasses from BOTH parties running this country.

August 10 2014 at 3:02 PM Report abuse -1 rate up rate down Reply