It soon may be easier and less expensive to obtain credit, thanks to updates to the FICO scoring system, which gauges how creditworthy you are. But be aware that there are some big catches.
The changes that could affect your credit score…
Unpaid medical bills will be given less weight. Under the current FICO scoring system, medical bills that end up with collection agencies are treated like any other unpaid bills and can take a major toll on a credit score. The new version of the system—FICO 9—will treat unpaid medical bills less harshly because these bills tend to stem not from irresponsible money management but from unforeseeable medical emergencies and/or billing disputes. Potential impact: 25 points added to your score.*
Bills sent to collection agencies will no longer hurt your score after they are paid off or otherwise settled. That contrasts with the current system under which such debts can continue to hurt a credit score for up to seven years, even if the bill has been paid in full. Potential impact: 100 points or more added to your score.
Most lenders will take nearly a year or more to make the changes. Government-sponsored mortgage backers Fannie Mae and Freddie Mac are very slow to instruct lenders to adopt a new credit-scoring system.
There’s no guarantee that lenders will ignore paid collections and downplay medical collections just because FICO credit scores will do so. These black marks still will be listed on consumer credit reports for up to seven years. Lenders and other companies that check credit scores often dig into the details of the credit report.
What to do: If you have medical collections and/or settled collections on your credit report, ask lenders which FICO scoring model they use before applying for a loan. If they still use an old model, you might want to wait until your credit score improves before applying for a loan or find another lender.
*These are estimates. The actual impact of these changes on your particular FICO credit score depends on numerous factors.