AP Business Writer
NEW YORK (AP) -- There are changes coming to FICO, a broadly used credit score, that may mean higher credit scores for many consumers. Banks, credit card issuers, auto lenders and other businesses use those scores to decide whether to lend to consumers and how much interest to charge them. A higher score could get you better terms on loans for cars and homes.
WHAT ARE THE CHANGES?
Fair Isaac Corp., the company behind FICO, says there are three significant changes to its metric, which it says is used in 90 percent of U.S. consumer lending decisions.
-- Debts that go to collections agencies and get repaid won't count against a consumer's FICO score.
-- Medical debts will have a smaller effect on the score. If your only major bad mark comes from unpaid medical debts, FICO says it expects your credit score to go up by 25 points. (Scores range from 300 to 850.)
-- A technique to analyze people's creditworthiness if they don't have much of a credit history.
WHY ARE THE CHANGES HAPPENING?
Regulators have focused on health care debts. In May the Consumer Financial Protection Bureau, a government agency, said consumers may be penalized too harshly for medical debt. The CFPB said medical bills are different from some other types of debts because they can be more expensive, unpredictable and caused by disputes between medical providers and insurers instead of bills consumers simply didn't pay.
The CFPB said that consumers who owe medical debt may have their credit scores underestimated by about 10 points.
WHO WILL BE MOST AFFECTED?
Greg McBride, the chief financial analyst for financial services company Bankrate, says the change will help many consumers, but it won't make a big difference if you already have bad credit or very good credit. For consumers with medical debt, this could be the difference between a decent score of around 675 and a good one around 700, or a good score and a great one around 725.
According to a study by the Urban Institute, 35 percent of Americans have debts and unpaid bills reported to collection agencies. The Association of Credit and Collection Professionals says health care-related bills account for about 38 percent of the debt that gets collected.
As for the new technique focused on those with little or no credit history, McBride says its effect remains to be seen. He says lenders want to get a better read on such consumers because they see them as potential customers and want to know which are likeliest to repay loans. The technique will help lenders evaluate people who don't have a bank account, mortgage or credit card -- often those with lower incomes, including young people and retirees.
WHEN DO THESE CHANGES GO INTO EFFECT?
Fair Isaac hopes lenders will use the newest version of FICO, which will be available in the fall. But lenders don't have to buy the updated version.
Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.