Revised FICO Credit Score Calculations Impact Settled Accounts

FICO credit scores have become more important in recent years. Today, more companies use the scoring to determine credit worthiness, grant approvals for rental housing, underwriting access to cell phone accounts, or if you will be required to leave a deposit when ordering satellite television.

As lenders and service providers focus more on credit scores, you are forced to turn your attention to what factors are included in your credit score. Fortunately, FICO continues to be actively engaged in adjusting their proprietary algorithms to reflect changes in consumer behavior. The goal of these adjustments is to provide better and more accurate assessments of consumer risk profiles.

In late 2014 the latest FICO score was introduced. This new scoring model included changes that will benefit millions of consumers, and better reflect the overall risk when looking at the likelihood that you will pay bills on time.

Major Changes in Scoring

The FICO Score 9 includes two major changes in the scoring that is impacting millions of consumers with both medical and collection debt. Around half of consumer collection accounts involve medical debt and 77 million consumers have collection accounts reported on credit reports. This new scoring model handles the debts differently than it had in the past, and has the potential to greatly benefit consumers with these types of reporting trade lines.

Prior to the new scoring algorithms, all collection debt was treated the same. It didn’t matter whether it was medical debt, credit card debt or student loan debt, collection accounts received the same scoring. Once a collection account or default account was reported it remained there for seven years, and was factored into your credit score, whether the debt was paid off or not.

Medical Debt

After testing, FICO determined that having medical debt did not, in and of itself, create a higher risk of default. Medical debt is different because the balance is generally not taken on voluntarily and yet, consumers with large medical debt, trade lines can accumulate large balances quickly with a much shorter repayment period than typical credit card debt.

The other issue with medical debt is that many delinquent accounts are the result of slow claims processing and payment due to insurance payment delays or disputes with the insurance company over coverage. These payments are not within the control of the consumer, yet the scoring models did not reflect this reality.
The changes to the new scoring model include a lighter weight being attributed to medical collection debts as well as a delay of 180 days before an account can even be reported to the credit bureaus so as to allow ample time for insurance claims processing and timely remittance of payment by providers.

Collection Accounts on your Credit Profile

Prior to the FICO 9 scoring changes, all collection accounts, whether paid or not, received similar weight, however, the older the account was, the less is counted towards your score. This scoring practice often resulted in marginal changes to your credit score even after a collection account was paid off, particularly if the account was several years old.

Now, accounts reported in collection that have been paid in full or settled will be removed from the scoring calculations, no longer negatively impacting your score for years to come. These accounts may still remain on your credit file, unless the creditor agrees to remove them altogether as part of a repayment agreement, but they will no longer count against you in the calculation of your FICO score.

Who Will Use the New Score?

There are many different versions of the FICO score that lenders and service companies can use to determine consumer risk. While auto lenders and credit card companies tend to be quick to adapt new scoring models, mortgage lenders tend to be slower in making changes. This means these changes may help you get your next car loan or a new credit card, but you might still have to show proof the account was paid or settled to a mortgage lender in order to get the underwriting department to approve your new mortgage.

Learn more about what makes up your credit score in this Blog post:

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