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
Robert Smith

" Hey Son, er Kid, let me show you to be a leech on the government."

August 10 2014 at 9:00 PM Report abuse -2 rate up rate down Reply
Robert Smith

LMAO jimmuh needs attention.

August 10 2014 at 8:54 PM Report abuse -3 rate up rate down Reply
Robert Smith

Sorry Mac too ~~~!!

August 10 2014 at 7:51 PM Report abuse -3 rate up rate down Reply
1 reply to Robert Smith's comment

Still posting to an empty board?

Nah, not sad at all.

August 10 2014 at 7:59 PM Report abuse +1 rate up rate down Reply
4 replies to's comment
Robert Smith

Dechagtraciefakeevan..................lmao ...Go get your FICO score.

August 10 2014 at 7:51 PM Report abuse -4 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
2 replies to fakeconomics01's comment
Robert Smith

Do you live in a tent, or section 8 housing?

August 10 2014 at 7:39 PM Report abuse -4 rate up rate down Reply
Robert Smith

Do you really need a welfare check ?

August 10 2014 at 9:28 PM Report abuse -4 rate up rate down Reply
1 reply to Robert Smith's comment

Unfortunately for many people, they HAVE to rely on public assistance because they've either lost a good paying job or had some medical calamity or they had to apply for disability and/ or had an employer who was either too cheap to offer a health care plan, or it wasn't worth the paper it was printed on. I'd count my blessings if I were you, and I would certainly never mock or minimize other people who suddenly find themselves facing financial ruin over some accident or job loss, because that's just plain CRUEL and COLD. How wonderful it must be for people like you who just don't understand..... or even give a damn because they've never been backed into bankruptcy or disability!

August 15 2014 at 12:22 PM Report abuse rate up rate down