Formula Changes May Raise Individual Credit Scores

In our electronic age, it is tough to avoid negative reporting on your credit report. An honest oversight could mean a missed payment, and one 30 day late payment will drop a 780 credit score as much as a hundred points. The drop is less if you have a lower credit score. Likewise, a disputed collection account can also affect your credit score, even if the matter is ultimately paid or otherwise resolved.

Recently, the Fair Isaac Corp. announced that it will stop calculating FICO credit scores using collection agency debts that have been paid or settled. It will also give less weight to unpaid medical bills that are with a collection agency. This change in the credit score formula is expected to make it easier for tens of millions of Americans to get loans.

The Fair Isaac Corp. made this move after months of discussions with lenders and the Consumer Financial Protection Bureau. The intent is to increase lending opportunities for consumers without creating greater credit risk. A higher credit score generally means lower interest rates for personal loans, credit cards, and major purchases, such as vehicle or real estate.

According to Experian, a major consumer reporting agency, 106.5 million consumers have a collection account on their credit report, and 9.4 million accounts have no balance. Additionally, approximately 64.3 million Americans carry one or more medical collection account on their on their credit report. Consumers are sometimes surprised to discover that their insurance company did not pay a medical bill, and can learn of this failure only after the account has been turned over to collections.

Fair Isaac will offer its new scoring model, named FICO 9, to credit bureaus this fall and to lenders later this year. However, it is up to the credit bureaus and lenders whether to use this new scoring model. It often takes lenders several years to adopt the newest version.