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FICO changes may save consumers billions -- but not soon, experts say

Changes to credit scoring could save consumers billions
Medical debts will no longer inflict so much damage on consumer credit scores
Changes to FICO scoring seen as victory for Consumer Financial Protection Bureau

America’s most widely used credit-scoring system is being revised to reduce the negative effect of overdue medical bills and to quit penalizing consumers who pay off debts that had been assigned to collection agencies.

The changes to the hugely influential FICO scoring system could make it easier for millions of Americans to get loans at lower rates and eventually save consumers billions of dollars.

Experts cautioned, however, that borrowers might have to wait for a year to see change because lenders will not quickly overhaul their systems to evaluate consumers and price loans for them.   

For consumers whose only major delinquency is an unpaid medical bill, the changes would increase a credit score by 25 points, according to Fair Isaacs Corp., whose FICO credit ratings are the basis for scores published by the three big credit-rating agencies.

The changes, released Thursday, address a major point of contention between FICO and consumer advocates, who complained that medical patients frequently are left in the dark when insurers reject payment on a bill, which can then go to collection.

A Consumer Financial Protection Bureau study this summer found that both paid and unpaid medical debts unfairly penalized a consumer’s credit rating.

The revised system, called FICO Score 9, will be made available to lenders through the three major credit-rating agencies starting this fall, Fair Isaacs said. The San Jose-based company said the improved scoring methods also would help lenders do a better job of assessing the risk of consumers with limited credit histories.

The National Assn. of Realtors applauded the changes, saying they would “ultimately make a real difference in the lives of millions of Americans” who have been shut out of the housing market or forced to pay higher mortgage interest rates “because of flawed credit scores.”

“Since the housing crash, overly restrictive lending has been the greatest obstacle to homeownership,” the real estate trade group said.

Nick Clements, a credit-scoring expert who heads Magnify Money, a personal finance site, said the changes have the potential to save consumers billions of dollars, noting that 64 million Americans have a medical collection item on their credit reports.

Clements, who spent more than a decade building credit-scoring models for financial institutions, said banks likely will take a year to 18 months to analyze the effects of the new scoring on their loans and set up new pricing strategies. And improvement won’t be automatic.

“Just because FICO says that someone is low risk does not mean a bank will treat them as such,” Clements said.

Though the changes are a victory for the consumer bureau, the agency needs to keep close watch on how the new rules are put into effect, he said.

“There is a real risk that banks use the score only to accept new people," he said, "not to lower rates on customers with demonstrably lower risk.”

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