credit & debt

New Formula for Credit Scores

The changes could make a significant difference in FICO scores.

I heard that FICO is making changes to its credit-score calculations. What are the changes, and how will they affect my score? --T.M., Phoenix

FICO is making two changes. Medical bills in collection will no longer affect the calculations. And the score will ignore other types of debt that went to collection but have been settled or paid off (previously, paid and unpaid collections with an original balance of more than $100 counted the same). Note that it may take lenders a year or more to adopt the new scoring model.

FICO changed the formula after the credit reporting agencies started to report unpaid medical debt separately. “Consumers whose only negative is an unpaid medical debt in collection are not a credit risk,” says Anthony Sprauve, of FICO. The change could boost scores by up to 25 points.

The other change can make a bigger difference. If the only negatives on your report are collection accounts that have been reported to the credit bureaus as having a zero balance, the new formula could make your score “fly through the roof,” says John Ulzheimer, of CreditSesame.com.

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