Fair Isaac Corp. FICO +0.15% said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.
As of July, about 64.3 million consumers in the U.S. had a medical collection on their credit report, according to data from credit bureau Experian. And of the 106.5 million consumers with a collection on their report, 9.4 million had no balance—and won’t be penalized under the new credit-score system.
More than half of all debt-collection activity on consumers’ credit reports comes from medical bills, according to the Federal Reserve. Such activity results in lower credit scores for consumers, meaning that lenders are more likely to be cautious in extending credit.
The impact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers’ credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points, said Mr. Ulzheimer.
The lower weight given to unpaid medical debt could increase some affected borrowers’ FICO scores by 25 points, said Mr. Sprauve
As noted in some of the excerpts from the WSJ article, many home loan borrowers today have some sort of medical collections whether paid or unpaid on their credit reports. The fact that FICO will be giving less weight to this should help many VA, FHA and conventional borrowers earn better credit scores. Additionally, the fact that FICO will stop penalizing borrowers for collection accounts that have already been paid will be a big plus for home loan applicants. This is all great news for home loan applicants.