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Changes in FICO scoring could improve credit access
SAN JOSE, Calif. (8/11/14)--The most-used credit score in the country will no longer include records of consumers failing to pay bills if the bills are paid or settled, according to a report by The Wall Street Journal .

The change is expected to lead to higher FICO scores for those consumers, which could lead to more lending at financial institutions such as credit unions. Fair Isaac Corp.'s FICO credit score is based on consumer credit files of three national credit bureaus--Experian, Equifax and TransUnion.

Fair Isaac announced last week it would stop including records of a consumer failing to pay a bill if the bill has been paid, or settled with a collection agency. The company also said it will give less weight to unpaid medical bills that are with a collection agency.

Lower FICO scores can lead to loan denials, or higher interest rates, and according to The Wall Street Journal , collections can affect credit scores as much as foreclosures and bankruptcies.

"Credit unions already work closely with members seeking credit, and this FICO change will give them another tool to help more members with their credit needs," said Mike Schenk, interim chief economist for the Credit Union National Association. "It will also help credit unions keep credit costs to members down."

Credit unions are already generally able to provide lower loan rates to members. According to CUNA's Economics and Statistics Department, financing a $25,000 new automobile for 60 months at a credit union will save a member an average of $146 per year in interest expense compared with a bank.

John Ulzheimer, a credit expert at consumer credit website Credit Sesame , told The New York Times last week that the FICO change likely wouldn't be the difference between a loan approval or denial, but it is enough to lead to a more advantageous rate. But consumers whose score is currently deflated due to medical debts can expect to see their score "go through the roof," Ulzheimer said.

The Wall Street Journal cited data from credit bureau Experian that says approximately 64.3 million consumers in America have medical debt collection on their credit report.

The Consumer Financial Protection Bureau released a study in May that said 99.4% of medical debt information is reported to national credit rating agencies (NCRAs) by collection agencies.

"The use of medical collections in credit scoring models has generated concerns stemming from the unique circumstances under which these debts arise and come to be reported to the NCRAs. Among their unique characteristics is that consumers may sometimes be unaware that the medical collections exist," the report reads. "If consumers are unaware of their medical collections or they view them as illegitimate because they are charges their insurance should have paid, then these debts may provide little information about their creditworthiness."

Use the resource link below to access the CFPB's report.

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