Every American of a certain age knows what a FICO score is. A FICO score is the measure by which your credit rating is judged, and it can affect every area of your life. However, there may be relief on the horizon for some people. After studies conducted by the Consumer Financial Protection Bureau and a period of re-evaluation, the mechanic for calculating FICO scores is being upgraded and made more exact, which will improve some scores noticeably.
Debts Are More Complex
The impetus behind the review and upgrade of the FICO software is a realization, spurred on by the CFPB studies, that debt models for modern Americans are growing increasingly more complex. Regulatory changes and shifts in family dynamics are affecting credit scores.
For example, a major problem for both lenders and consumers currently is that the present FICO model is inexact, especially when it comes to assessing the risk of people with very little previous credit. These so-called ‘thin files’ give very few clues to lenders under the current system, making each decision about a loan essentially a judgment call. A recent FICO news release gave the example of levels of nonpayment – if a consumer paid their bills, they were classified as reliable. If they did not, they were classified as a risk. Such absolute classifications do not accurately reflect how nuanced and complex someone’s debt picture can be.
To combat this antiquated model, there are major changes planned in how the FICO model calculates the severity of certain debts. One of the major issues with the old model is how medical debt is handled. Medical debts are handled in roughly the same way as any other debt, and there is a growing school of thought which states that they should not be. They differ significantly from most other debts in that most people do not willingly take them on – they tend to appear out of nowhere. The data from FICO’s studies tends to bear this out, and as a result, FICO 9, the new model, will grade medical debt in a less punishing fashion.
Another major change is how cases that involve a collection agency will be assessed. With the current model, cases where a debt went to a collection agency but was ultimately settled (or paid off) will still reflect extremely negatively on one’s credit report. FICO 9 will treat unpaid debts differently – in other words, paid collections accounts will be ignored when compiling your FICO score. If a debt is paid late, in theory that person is a better loan bet than someone who never pays a debt at all. Thus, consumers who had past credit issues, for example, will have a far better opportunity to rebuild their credit if they belatedly paid the majority of their past debts.
In regards to people with ‘thin files’, FICO 9 will also change the algorithm to more accurately reflect the reasons for someone’s lack of credit. This is good news for people like newlywed couples, who may be in the market for their first home, but have little to no credit history together. They do not deserved to be penalized for having no credit, rather than poor credit.
An Expert Attorney Can Make The Difference
While FICO 9 promises marked changes that will result in improvements for many, not everyone will see improvements, and for some it will be too little, too late. If you are in debt and need help, we at the Law Offices of Stephen B. Kass, PC is a great place to turn. We have a long history of success, and we can put our expertise to work for you.