Fair Isaac Corp. (FICO) is changing how it calculates credit scores by revising its current credit-scoring system. The revisions could save U.S. Consumers billions of dollars when borrowing for mortgages or auto loans.
The two main criteria being closely examined are overdue medical bills and payments sent to collection agencies. In the past, situations like these could easily affect someone’s credit score, quickly putting them in a “lower tier” for borrowing. Now, the revision plans to look closer at these two situations and reduce the negative impact on consumers’ credit scores.
Low credit scores result from overdue medical bills and payments sent to collections. Still, if the only criteria lenders are looking at is that credit score number, many consumers will be denied mortgage or auto loans. Even if consumers have paid off these bills, they will still see an impact on their credit scores. With the new criteria set by FICO, lenders will now examine those transactions, looking beyond the actual credit score number and more into whether they have met their obligations.
This new, comprehensive method of analyzing consumer credit reports will make borrowing easier for consumers. Their scores could improve by about 25 points. While this revision will enhance the position of those with previously poor credit scores, it does not guarantee approval. Instead, it will influence the terms of the approval.
This revision to the nation’s dominant credit report system may improve the borrowing position of millions of U.S. consumers. Although it will be very beneficial, it may take a while for lenders to transition to this system. In addition to these changes, FICO’s revision will prioritize more recent financial behaviors. For example, if a consumer has financial troubles but has since established a consistent pattern of paying bills on time, that positive behavior will carry more weight. This shift reflects a more realistic understanding of financial hardships and recovery, giving consumers a fairer opportunity to prove their creditworthiness over time.
This shift also underscores the importance of financial literacy in navigating the evolving credit system. By understanding how factors like medical debt and payment history are now assessed, individuals can make more informed decisions about their finances.
While these updates are encouraging, consumers should remain mindful of their credit health. Maintaining good financial habits, such as paying off debts and low credit utilization, remains essential. As FICO implements these new criteria, it’s important to remember that every lender has its unique approach to assessing creditworthiness. However, these revisions mark a significant step towards a more compassionate and accurate credit scoring system.
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