FICO® Score 9

Aug 14, 2014 by

range of credit scoresMaybe you’ve never heard of the Fair Isaac Corporation, but you probably know of the FICO® credit score the company peddles. As the most widely used credit score among consumer lenders, the FICO score’s formula matters. And when the formula changes—as it will this fall—millions of Americans will be affected.

New FICO Credit Score

On August 7 FICO announced FICO Score 9, a revision in the formula that underlies its popular credit score. To be rolled out this fall, FICO’s score calculation will change in two ways:

  1. FICO’s new score will differentiate between medical debt in collections and non-medical debt in collections. Negative credit information related to medical debt will ding the consumer’s credit score less than before FICO Score 9. According to FICO, “the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.”
  2. Whether you pay off a debt in collections in full or in part through debt settlement will not matter in FICO Score 9. The debt will be considered repaid, period.

Why the FICO Score Change?

FICO is acknowledging that medical debts in collections are not as strongly correlated with future likelihood to pay debts as are non-medical debts in collections. Millions of Americans with otherwise stellar credit records have unpaid medical debt due to an insurance company’s failure to pay, refusal to cover certain medical expenses, red tape, or perhaps the policyholder’s breach of lifetime maximum benefits. Medical debt is the #1 reason, by far, for bankruptcy in the US.

In what passes for progressive thinking in America, with Score 9, FICO is conceding that not everyone who gets seriously sick or hurt and then gets screwed by their health insurance provider is a deadbeat who habitually fails to pay what he or she owes.

The Upshot of the FICO Score Change

If your credit report includes debt in collections but that debt is medical debt, your FICO score should rise. That matters, whether or not you borrow money.

Formerly if you negotiated a debt settlement and so repaid less than the full amount due, a notation to that effect likely would appear on your credit report, dinging your score. With FICO Score 9, there’s no credit score incentive to pay a debt fully instead of negotiating a settlement for partial payment.

Will You Be Affected?

Do you anticipate any change in your credit score when FICO Score 9 is rolled out? Do you pay any attention to your credit score? (I don’t. 🙂 )

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  • This will be good for a lot of people. Medical debt is hurting many credit scores. Do you know how much of an impact it will have with FICO 9?

    • FICO says its new score based on a credit report with only unpaid medical debt will rise an average of 25 points.

  • Thanks for giving some background on this. I had heard the rules changed slightly but was not sure how. I am a big fan of the new formula breaking out medical and non-medical debt.

  • I’m not affected but sounds like a fairer calculation. Most of the time medical bill isn’t the debtor’s fault, so I believe it will be a good news for many people.

    • Yes, unlike most consumer debt, we often don’t choose to take on medical debt. I think the distinction is valid, especially in a country where many can’t afford health insurance.

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