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FICO updates scoring criteria, reduces weight of medical debt

Arkansas consumers may be interested in a move by FICO that may improve credit scores for people with outstanding or settled medical debts. The company, which is a provider of personal credit scores and related data, announced on Aug. 7 that certain medical debts will be treated differently in score calculations going forward.

Specifically, the company said that overdue payments on medical debt will be discounted and medical debts that have been settled will be ignored in credit score calculations. The former adjustment may improve median credit scores by 25 points for those whose debts are primarily medical. According to an expert on credit and former employee of FICO, the changes will allow for more accurate risk assessment for those making lending decisions. Weighing medical debt less heavily aligns with the conclusions of a report by the Consumer Financial Protection Bureau, which said that those who had such obligations were overly penalized on their credit scores, as compared to those with other kinds of debt.

Sometimes people are unaware of outstanding medical debts, believing that insurance has paid the bill, until a collector notifies them otherwise. Even if the debt is then paid immediately, the debtor's credit score may suffer. The credit expert said that impact of the changes is still uncertain, because lenders must first begin using the new scores before borrowers realize any benefit. According to FICO, scores based on the updated scoring will be available to lenders beginning in the fall.

For those with bad credit, the scoring adjustments might mean an improvement in borrowing power, or they might have little effect. A bankruptcy law attorney may be able to help consumers understand the likely impact of the scoring changes on individual credit scores as well as suggesting options for debt relief.

Source: Reuters, "FICO's new scoring model to help lenders better assess risk", Amrutha Gayathri and Emily Stephenson, August 08, 2014

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