How FICO's new scoring could boost your score

Most consumers are aware that their FICO score is the gatekeeper to securing credit, determining the rates lenders are willing to offer on everything from mortgage loans to credit cards.

For some, getting a higher FICO score is about to become much easier.

That's because Fair Isaac Corp. (FICO), the company that calculates the country's most widely used credit score, said it will recalibrate its measures, including giving less weight to debt linked to medical bills. It will also stop including records of failures to pay bills if the consumer has settled with a collections agency or paid the debt.

The changes come as more Americans are increasingly struggling with medical-related debt, with more than half of collections on credit reports tied to medical bills. Consumers are can be "overly penalized" for medical debt that goes into collections, as it shows up on their credit reports and lowers their creditworthiness, the Consumer Financial Protection Bureau said in May.

"This is a significant change," said CreditCards.com senior industry analyst Matt Schulz. "Medical billing can be pretty confusing. A lot of people have run into situations where they get a bill and are surprised by it, because there are ambiguities with doctors and insurance."

He added that some people with medical bills in collection may be "credit-worthy folks who are at the mercy of what can be a confusing billing system."

Of course, some critics say the recalibration may lead to Americans taking on even more debt, at a time when one-third of consumers have more credit-card debt than emergency savings. At the same time, more than one-third of Americans have debts in collections, which means they've fallen significantly behind in paying their bills.

The rule remains that consumers need to be aware of their own limits and habits when it comes to taking on debt, Schulz notes.

"Some people can put everything on the credit card and pay it off at the end of the month, while others aren't able to resist the lure of getting credit," he notes. "It's still important for consumers to know themselves and what they handle."

Below are four take-aways from the new FICO scoring system:

1. If you have medical bills in collections, you may see your credit score rise. With the new weighting system, consumers whose only credit blemishes are medical debts will see their scores rise. The median FICO score for consumers in this category will see their numbers rise by 25 points, Fair Isaac said.

2. Paying off a bill in collections now makes sense. With the new system, consumers won't have to carry the stigma of a bill in collections on their credit report for seven years. That previous system gave conflicting messages to consumers on whether they should pay off the debt, notes MagnifyMoney chief executive Nick Clements. Now, people will be rewarded for settling the outstanding debt.

3. Some consumers may now receive better loan rates. For consumers whose credit problems are linked to medical bills or lingering black marks from past collections that are now paid off, a rise in their FICO scores may help them secure better loan rates. For instance, consumers with scores above 760 points may receive a 30-year mortgage loan at 3.823 percent. For people with scores at 700 to 759, that jumps to 4.045 percent, according to FICO.

4. The new credit score system will take a while to implement. That's because lenders don't all upgrade to the new FICO system at the same time, Schulz notes. It's similar to businesses deciding whether or not to upgrade to a new version of Windows. Banks also will spend time analyzing the impact of the recalibration, notes Clements. Across the board, it could take more than a year for changes to trickle down to consumers.

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