Will Changes to FICO Scoring Affect your Credit Score?

September 15, 2014

Are you thinking of applying for a loan in the future? If so, you might want to know that there are some upcoming changes in how FICO calculates credit scores. This is important to be aware of since FICO is one of the most widely used credit scoring methods. The new FICO® Score 9 will incorporate three major changes.

1) Unpaid medical debt and medical bills in collections will now be given less weight. This is significant since it has been estimated that one in three Americans struggles to pay medical bills. The Consumer Financial Protection Bureau (CFPB) actually highlighted the overly harsh penalties medical debt creates on credit scores in a recent report. FICO estimated the median score increase for people whose only negative credit reference is medical collections will be 25 points. If you have old medical accounts that were either paid off or settled, this will no longer hurt your credit score.

2) “Thin-file” consumers, people with little or no credit history, will likely benefit from a new method of credit score calculation. Repayment behaviors are now measured in degrees of risk rather than simply being labeled as being responsible or not paying bills on time. This change is aimed at better assessing the repayment risk of people without a lengthy credit history.

3) Debts that have been turned over to collections but were subsequently resolved will no longer be a credit score detractor. This means that if you have made past mistakes but were able to turn things around and demonstrate better financial habits, your credit score may benefit from this upcoming change.

According to FICO, the updated method will be available to lenders through the credit bureaus (Trans Union, Equifax, and Experian) in the fall. It is up to lenders to adopt the new scoring methodology and many will probably take their time to validate the scores and compare them to approval rates. It’s also important to realize that FICO isn’t the only credit score available.

How will this impact your credit score? If you already have an excellent credit score and a well-established credit history then this will likely have little or no impact on you. However, if you fall into one of the three previous categories of consumers then you can expect to see changes in your credit score. People without an extensive credit history could now find it just a little easier to get a loan.

Regardless of how this ultimately affects your credit score, the same old principles to borrowing still apply. Make sure borrowing decisions fit into your overall financial life plan. Always determine how much you can afford to borrow in advance. Know the terms of any loan or consumer credit arrangement and choose the solution that fits your short and long-term goals. Establish a repayment plan and understand the true cost of borrowing. If you can follow those basic principles and maintain a good credit score, you can avoid costly financial mistakes and save money.