This fall changes are coming to the way FICO scores are calculated. FICO is a broadly used credit score used by banks, credit card issuers, and other business to decide whether to lend to consumers and how much to charge them. People with higher FICO scores get the best (or lowest) interest rates. Those with lower FICO scores typically are charged the highest interest rates. FICO scores range from 300 to 850. People with excellent credit usually have a FICO score of 750 or above.
Fair Isaac Corp., the company behind FICO, says there are three significant changes to its metric, which it says is used in 90 percent of U.S. consumer lending decisions.
- Debts that go to collections agencies and get repaid won’t count against a consumer’s FICO score.
- Medical debts will have a smaller effect on the score. If your only major bad mark comes from unpaid medical debts, FICO says it expects your credit score to go up by 25 points.
- A technique to analyze people’s creditworthiness if they don’t have much of a credit history.
Changes were made after the Consumer Financial Protection Bureau, a government agency, said consumers may be penalized too harshly for medical debt. The CFPB said medical bills are different from some other types of debts because they can be more expensive, unpredictable and caused by disputes between medical providers and insurers instead of bills consumers simply didn’t pay. For consumers with medical debt, this could be the difference between a decent score of around 675 and a good one around 700, or a good score and a great one around 725.
As for the new technique focused on those with little or no credit history, this will help lenders evaluate people who don’t have a bank account, mortgage or credit card — often those with lower incomes, including young people and retirees.
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