Based on recent research related to the effect of unpaid medical bills on one’s credit score, FICO is tweaking its credit score methodology in a significant way. Effective this fall, FICO will reduce the weight attributed to unpaid medical bills and bills settled with a collection agency; this is especially good news for the 18-35 age group.
FICO acknowledges that over half of the collections appearing on credit reports are related to medical bills. Previously, it had been assumed that borrowers with outstanding medical expenses were too risky to lend to—but FICO’s research has indicated that many of those collections may have been the result of miscommunication between consumers and their provider or insurance company.
To address this, and the resulting average credit score disadvantage of 25 points and tens of thousands of dollars in additional interest on home mortgages and car loans, FICO has decided to give less weight to unpaid medical bills and to not penalize the credit scores of consumers who have settled with a collections agency.
Whose credit score does this help?
As alluded to earlier, perhaps the biggest beneficiary of this new FICO adjustment will be the generation that came of buying and borrowing age during the Great Recession. Largely shut out of homeownership due to a lower average credit score (628), heavier student loan debt, and lower credit card balances than any other generation, their borrowing has also been severely restricted by higher interest rates.
It is hoped that FICO’s new methodology will encourage more positive credit behavior for this generation of consumers, ultimately resulting in great access to credit. In addition, FICO’s adjustment is good news to those who have been affected by red tape in the wake of costly medical bills.
The FICO adjustment is expected to have an incremental impact on borrowing, affecting car and credit loans earlier on, with the trickle-down effect eventually reaching the home mortgage industry. Overall, however, the change is expected to have a minimal impact on the economy, since household spending will not likely increase dramatically.
For more information on how FICO’s changes can improve your credit score, consider contacting a credit repair agency like Ovation. We offer free consultations.