Important credit scoring changes and what they mean to you

Last week the nation’s most widely used credit scoring model got a reboot and the result may be a generous boost to your credit score.

FICO announced the launch of FICO Score 9, their updated credit scoring model. The most notable changes involved collection debt and the impact of that debt on your FICO score.

Medical Debt

The first change regards medical collection debt – hospital and doctor bills that have gone unpaid and then sent to either an internal collection department or a third party collection agency. Previously, these medical collection debts impacted your score in the same way as unpaid credit card or loan accounts.

Medical debt, however, is rarely related to reckless spending or poor credit management. Literally anyone, in any walk of life, can be quickly overwhelmed by out-of-control medical bills.

Recognizing that unpaid medical debt is not a clear indicator of a borrower’s ability or intent to repay future debts, FICO has refined their scoring. Now unpaid hospital bills have a significantly reduced impact, in relation to unpaid credit or loan bills.

Paid Collection Debt

The second noticeable change in the FICO Score 9 has to do with debts that have gone to collection and then been paid in full. Generally all negative marks in your credit history remain on your report for seven years. If you have an account that went unpaid, your score would be impacted by that negative event. Your score would likely improve if you paid that debt off, but the collection account would continue to show on your report and impact your score for seven years.

With the revisions included in FICO Score 9, collection accounts that are paid off are no longer factored into your current credit score at all.

This is a huge change and puts a very clear value on taking care of old, lingering collection debts.

Potential Impact

There are a number of different credit scoring systems used by lenders, so there’s no guarantee how these changes will impact your next lending decision. It should be noted, however, that FICO is currently used by approximately 90 percent of lenders to help make lending decisions.

There’s no way to accurately gauge how these changes will directly impact you and your score. That said, FICO estimates that the median credit score for those whose only derogatory mark is unpaid medical debt could increase as much as 25 points.

The basics of building solid credit remain, so how you use credit shouldn’t change. But if you’ve been hit hard by unforeseen medical issues, this means you should have a slightly easier time recovering financially. And if you have unpaid collection debts you may want to consider getting those paid off.