Credit scores can affect the interest rates you are approved for on your loans, your car insurance payments and even your job prospects. What you may not know is that, the Fair-Isaac Corporation (better known as FICO), changed its rules governing the formulation of credit scores.
FICO’s new criteria will make it easier and cheaper for more people to borrow. They’re updating their standards in response to the financial reality that most Americans are facing. However, the changes could take as much as a year to take effect.
For an average consumer, the change will probably be about a 25-point increase. That’s often not enough to move a loan application from denied to accepted, but it is enough to improve interest rates for most borrowers.
The company was quick to point out that this was not about making it easier for people to borrow. Rather, the move was based on valuation. The old model was making credit seem too risky, leading to higher prices. The new FICO 9 scoring system provides a more accurate picture of the risks that are involved in lending. Let’s take a look at some of the highlights.
- Unpaid medical bills matter less. If you have a large bill that’s outstanding at a hospital, even if it’s been referred to collections, it will no longer impact your credit score. Given how common medical bankruptcies are, FICO has decided that unpaid medical bills are no longer a reliable indicator of whether someone will pay their bills on time.
- Accounts that have been settled or paid off with a collection agency will no longer count on your credit score. Under the new system, those accounts with a repayment plan in place will not factor into your score. People who have been responsible users of credit for the rest of their lives but ran into trouble in the last several years will see their lives improve considerably.
- FICO is changing the way it handles people with little to no credit history. The new model takes a more nuanced look at how people have used their limited credit in addition to a lot of other data. This change should make it much easier, especially for young people, to get home loans and other lines of credit.
While not all lenders will adopt these standards immediately, most experts expect institutions will flock to the new standard. Industry leaders believe the most conservative institutions could take as long as 18 months to analyze the effects of implementation.
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