FICO announced recently that an updated version of its score calculation model will no longer weigh medical debts—which, according to the Federal Reserve Board, account for half of all collections on credit records—as heavily as before.
Beginning in the fall, FICO’s new score calculation model, which the company said is “more predictive of a consumer’s likelihood to repay a debt than previous versions,” will become available to lenders across the country.
According to FICO, the median score for consumers whose only major negative items are medical collections will go up by 25 points, meaning more consumers could qualify for lower interest rates on loans.
The CFPB released a report earlier this year showing consumers’ credit scores could be overly penalized for medical debt that enters collections and ends up on their credit reports.
The study indicated current credit scoring models may underestimate the creditworthiness of consumers and may not credit consumers who repay medical debt that has gone into collections.
Consumers, however, will not see the acclaimed benefits of the new model unless lenders decide to make the switch. Jim Wehmann, the executive vice president of scores at FICO, said the advances in the updated version provide “significant” incentives for lenders to upgrade.
“U.S. lenders can more consistently and precisely assess new applicants and existing accounts with a more robust credit score built on the most current credit data available, while minimizing operational hurdles associated with adoption and compliance,” Wehmann said. “We stand ready to help lenders make that upgrade as smoothly and quickly as possible.”