FICO's new scoring model to help lenders better assess risk

(Reuters) - A move by personal credit score provider FICO FICO.N 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 debt.

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 (CFPB).

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 uncertain.

“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,” Ulzheimer said.

Citigroup Inc's C.N consumer finance unit, OneMain Financial, and Fortress Investment Group LLC FIG.N 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.

“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 said.

Editing by Saumyadeb Chakrabarty