August 15th, 2014 12:28 PM by Scott Bray
WASHINGTON — When Fair Isaac Co. announced a new credit scoring model last week, it earned significant media attention and won praise for helping consumers marred by medical debt to boost their scores.
At issue is an updated credit score model, FICO Score 9, launched by Fair Isaac last week which will exclude certain paid debts at a collection agency and differentiate between medical and non-medical debt in collection.
The new model will lower the impact of medical debt on a consumer's credit score since reports show many consumers are often unaware of such a debt until it hits a collection agency or they seek financing.
FICO said the new model could bump up a consumer whose credit score is only marred by a medical debt by a median of 25 points. That amount difference could affect the price of a loan if the borrower was a few points away from hitting a threshold number that would lower their interest rate or make more credit available.
The changes do expand the ability to lend to some people who may have had trouble getting credit in the past but it would most likely be the people who are in the margins or grey area.
Bankers said it is also going to take while, likely at least a year, for the new model to be implemented. The FICO 9 model would essentially first have to be adopted by the three main credit bureaus and then lenders would buy into it from the bureaus. So it's going to take a period of time from when the new model actually rolls out to get the banks to see the value and make the necessary software changes, and that is not something that's going to happen overnight.