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Revamped FICO credit score might ease rates on consumer loans

| Sunday, Aug. 10, 2014, 12:01 a.m.

WASHINGTON — The most widely used credit score is getting a makeover that could help millions of Americans qualify for better interest rates on mortgages, auto financing and student loans, saving them thousands of dollars.

Starting this fall, a new version of the FICO score no longer will factor in past-due payments that have been made or give medical debt as much weight in its calculations. Someone who has unpaid medical debts but whose credit history is otherwise good should see his or her score rise by as much as 25 points, according to Fair Isaac Corp., which is commonly called FICO.

Anyone who has applied for a line of credit or even an apartment knows how important FICO scores have become. The scores, which are based on a 300- to 850-point scale, are calculated using information from reports generated by the three major credit bureaus: Experian, TransUnion and Equifax. A recent study by research firm CEB TowerGroup showed that lenders used FICO scores in making 90 percent of consumer loan decisions.

Changes to the scoring model could make it easier for people to secure affordable loans that they can sustain over a longer period. But a vast majority of lenders would have to adopt the new scoring model for it to have a major impact on consumer credit.

In the five years since FICO last introduced a new model, just half of its customers have made the switch.

“It takes a long time for credit scoring systems to achieve critical mass. It takes years for lenders to gravitate from older versions to newer versions,” said John Ulzheimer, a credit expert at Credit Sesame, a consumer-credit website. “The changes will only help consumers inasmuch as the lenders they apply with actually use that new score.”

FICO decided to revamp its scoring model when lenders and regulators raised alarms about medical debts in collection dragging down the scores of people who were otherwise responsible borrowers.

The company said it studied two years of consumer data and found that unpaid medical debt was not a clear indicator of credit risk.

“People who had a good credit history, where an unpaid medical debt was their only negative, they were still good, reliable customers,” said Anthony Sprauve, a spokesman for FICO. “They're not going to default; they're going to pay their bills. The unpaid medical collections is an anomaly.”

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