Whether you’re just starting out after college, are a busy young professional or an adult well into your career, your credit score is critically important to your life. It’s more than just a number, it’s a scorecard you’re judged by for many things. It determines how much you’ll pay for car insurance, your cell phone contract, whether you’ll have to put down a deposit to get cable or utility services and whether or not you get a job offer you really want. Today we’ll take a look at changes in FICO score calculation.
What Is FICO and How Do They Rate You?
FICO stands for Fair Isaac Corporation and they provide software that calculates credit scores. While other firms offer products to crunch this data, FICO is the biggest and best known. Most lenders use FICO scores to determine whether they’ll offer you credit and under what terms. The FICO calculator draws information from Equifax, TransUnion or Experian and then crunches a number that’s intended to be a predictor of how credit worthy you are – i.e. how likely you are to pay your debts.
What FICO Is Changing
FICO has just released its latest software product – FICO Score 9 – and has made two major changes that should increase credit scores for millions of people across the country – maybe even you. If you always pay all your bills on time and have a spotless credit history, you shouldn’t see any impact from the adoption of FICO’s new calculation, but for those with a spottier past, this could be a big benefit.
The two major categories of debt that are changing are medical bills and accounts in collection. Past due medical bills are a major source of debt for many Americans – 20% are unable to pay their doctor bills. If your money is tight, particularly if you have student loans, these may fall to the bottom of your priority list but also isn’t necessarily an accurate predictor that you won’t pay other bills. Overdue medical bills will now carry much less weight in the FICO 9 calculation.
If you have a bill you don’t pay, the creditor itself will report you as late, then delinquent, which will lower your credit score. If they then turn the account over for collections, this can result in a second entry on your credit report. Even if you pay the debt to the collection agency, there is still significant damage to your credit score. Under FICO 9, if you’ve paid up, the collection account will not be calculated in your score. Unpaid collection accounts will still factor in, though.
What This Means for You
FICO 9 may boost your score if you have either of these issues on your credit, but only if the lender or creditor uses the latest product. The new calculation could boost the score of those who have good credit aside from unpaid medical bills by roughly 25 points. Those who have unpaid medical bills, as well as accounts that went into collections but then were paid (either in full or through a settlement), may see an even greater increase
The above will hold, but only if the creditor chooses to use FICO’s newest calculation. First, for those creditors that use other calculation methods, there will be no change. Second, for those creditors and lenders that don’t agree with the philosophy of the latest update from FICO, they can opt out and keep using the older model or go with another product altogether. We hope that most lenders and creditors will adopt this new model and that you’ll benefit from the changes.