The Fair Isaac Corp., better known as FICO, is the most widely recognized and used credit score in the nation. They have recently adjusted their metrics in a way that helps borrowers qualify for loans much easier than in the past, since the recession. This action should help Salt Lake City Realtors sell more property, as mortgage money will be more available and more buyers will qualify.
The Primary FICO Changes
FICO carefully protects its algorithms and formulas to thwart people from "beating the system." However, the major changes announced recently are more straightforward and clear than the consistent "tweaking" that FICO typically makes in its calculation formula.
The significant changes center on two issues that have been debated for eons, it seems.
- FICO will no longer consider paid collections in their credit score calculations. Consumer credit scores have historically been hurt by collections even after these collections were paid in full.
- FICO will now apply less weight to unpaid medical bills that have been given to collection agencies. In the past, FICO penalized consumers for even the smallest unpaid medical bills.
For decades, consumer supporters and experts have argued these points with anyone or entity that would listen. They have maintained that penalizing consumers for unpaid medical bills of a few hundred dollars, often just the patients' health insurance deductibles, the same as having a delinquent $40,000 auto loan or a six figure home mortgage loan, was unfair.
Similarly, penalizing borrowers settling their debts, whether in full or for less than the full outstanding balance, was equally unfair and excessive. It appears that lenders and the CFPB agreed with this position.
FICO either will no longer penalize consumers, in the event of paid collection debts, or greatly reduce score penalties on the over 64 million Americans that have one or more medical collection accounts on their credit report, or the over 100 million consumers that have a collection account on their report, if the collection has been paid or settled.
These enhancements help lenders because they result in greater precision. At the same time, the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.
This is good news for people trying to get a loan. They will either receive better interest rates or now they will qualify when they didn't qualify before.
Effect of FICO Changes
These changes should elevate the credit scores of millions of prospective borrowers, allowing them to qualify for loans and mortgages previously unavailable since the recession. You won't be surprised that critics of the new features are exercising their dissension.
At least one critic chacterized these changes as something like a "sharp knife--if you don't know how to use it, you can cut yourself." Most critics fear that more consumers, inexperienced or uneducated in managing debt, will only dig deeper holes in their debt profile, making them less able to handle credit.
However, most consumers will sleep more soundly knowing that, even if their credit reports formerly had some warts, they may now qualify for financing for autos, homes and other financing. The minimization of settled collection accounts, which formerly negatively counted as much as home foreclosures, from credit score calculations will help many borrowers meet lender qualifications.
Supporters of these changes foresee no significant increase in risk for lenders using the changes wisely and liberally. It appears they are correct, as the elimination of medical collections and the penalty minimization of paid collection accounts should not increase the repayment risk to unacceptable levels.
Lenders and Consumer Financial Protection Bureau (CFPB)
The FICO change culminates months of discussion and debate between some top lenders and the CFPB. Their joint goal was to fuel more lending without increasing lender credit risk. During and after the recent recession, most lenders have made loans only to the best quality borrowers having blemish-free credit reports.
Consumer lending, including home mortgages, has suffered greatly. Many borrowers, previously shut out by lenders, may now qualify for the loans they want. Instead of facing rejection or, at best, higher than market interest rates, these borrowers may now receive approvals because of the agreement between lenders and the CFPB.
These changes should enhance all banks' ability to make loans to previously unqualified borrowers since credit standards were severely tightened during and after the recession. The key FICO changes in their score calculations should ensure that millions of borrowers will now qualify for bank loans, without forcing the lenders to dramatically loosen their credit standards.