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By Amrutha Gayathri and Emily Stephenson
Aug 8 A move by personal credit score provider
FICO to leave out or discount medical debt from its
scores will boost the credit record of many borrowers, while
helping lenders to better assess risk.
The company, formerly known as Fair Isaac Corp, said on
Thursday that overdue medical payments that have already been
settled will be ignored while calculating credit risk.
It will also discount overdue medical payments yet to be
made under the new scoring model, helping improve the median
FICO score for consumers who mainly have unpaid medical debts by
25 points, the company said in a statement.
The new scoring system will do a better job of identifying
risky borrowers and help sub-prime lenders mitigate the risk of
doing business with such borrowers, said John Ulzheimer, a
credit expert and a former FICO employee.
Consumers end up with medical debt for different reasons
than they incur other debt, such as home loans or credit card
For instance, confusion about the amount covered by
insurance companies related to medications or procedures
sometimes means individuals do not realize they owe money.
After a debt collector calls, they might pay the debt
immediately but still take a hit to their credit score,
according to the U.S. Consumer Financial Protection Bureau
The FICO score changes will address that by weighing medical
debt less heavily than unpaid credit card debt and other
collection information, according to the statement.
However, the impact on lenders from the changes remains
"I am not exactly sure what impact this is going to have on
subprime lenders, because for the score to be meaningful to the
customers, the lenders have to actually start using that score,"
Citigroup Inc's consumer finance unit, OneMain
Financial, and Fortress Investment Group LLC subsidiary
Springleaf Holdings Inc declined to comment on the impact of the
new scoring system.
The FICO change comes after the CFPB said in a report this
year that credit scores overly penalize people with medical debt
compared to other types of debt. [ID: nL1N0O61IQ]
"Given the critical role that credit scores play in
consumers' lives, we welcome steps by industry to adjust how it
weighs medical debt in order to be as precise as possible in
predicting the creditworthiness of a consumer," a CFPB spokesman
said on Friday.
The new score will be available to lenders through the U.S.
credit reporting agencies starting this fall, FICO
(Editing by Saumyadeb Chakrabarty)