On August 7, FICO – the creator of one of the most widely used and influential credit scores – announced that it had recalibrated its credit scoring model to include a more nuanced way to assess consumer collection information, bypass paid collection agency accounts, and offer options to differentiate medical from non-medical collection agency accounts. The new FICO scores will no longer weigh medical debts as heavily as it did in previous iterations and will ignore any collections that have already been paid. Previously, the scores factored paid and unpaid collections equally, though it ignored amounts under $100.
“This will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent. 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,” according to a statement from FICO. As a result, many consumers may qualify for more attractive interest rates on various loans, potentially resulting in thousands of dollars in savings.
FICO used sophisticated modeling techniques to make the new scoring model more predictive of a consumer’s likelihood to repay a debt than previous versions. In the model development process, FICO data scientists represented a consumer’s repayment behavior in degrees of risk. The end result, according to FICO, is a score with an improved ability to assess the risk of lending to consumers with limited credit history. The model assesses consumer credit risk on all credit product lines – mortgages, auto loans, credit cards, and personal loans – and can be used across the entire customer credit lifecycle, starting with marketing/pre-screen, originations, and account management, all the way through early-stage collections.
“By applying innovative predictive modeling techniques on recent data to capture consumer credit behavior, FICO Score 9 will extend FICO’s leadership in providing the credit score that most accurately and fairly defines U.S. consumer credit risk,” said Jim Wehmann, executive vice president for Scores at FICO. “FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently.”
The Wall Street Journal reported that the new scoring approach came after FICO spoke with some of its largest customers, including major lending institutions, as well as regulators, who suggested that medical debt collections were unduly weighing on consumers’ scores. It then analyzed new data from the credit bureaus, and compared how consumer behavior varied depending on the type of collection debts on their credit reports.
The new FICO scores will be available this fall.