The company responsible for one of the most widely used measures of credit health is making changes to its current model that could boost credit scores nationwide.
In an announcement on Thursday, analytics and decision management firm FICO said its new credit model, FICO Score 9, "introduces a more nuanced way to assess consumer collection information," resulting in greater precision for lenders measuring a borrower's credit stability. The model will be available to lenders through the country's various reporting agencies starting in the fall.
"FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently," said Jim Wehmann, EVP for Scores at FICO.
The key difference in the new model is that strikes from medical collections will have a lower impact, reflecting the relatively low level of credit risk they represent. From just that change, the company expects the median FICO score will increase by 25 points among consumers whose only credit dents come from unpaid medical debts.
FICO isn't alone in its push to reassess how medical debts are reflected on a borrower's credit profile. In May, the Consumer Financial Protection Bureau (CFPB) released the results of a study finding that credit scores may underestimate creditworthiness by as much as 10 points for consumers owing on medical costs and by up to 22 points for consumers who have repaid their debt.
Often, consumers aren't even aware their debt has been sent to collections, CFPB said.
Another change in the FICO Score 9 model is that it will also discount any overdue payments that have already been made, leaving only unpaid collections as a mark.
While the changes may have a significant impact on approval rates for credit cards and auto loans, the effects will be more subtle for borrowers and lenders in the mortgage space, says Greg McBride, chief financial analyst for personal finance website Bankrate.com.
"These changes are going to be a positive for consumers, but it's not something that moves the goalposts," McBride said in a phone call. "These changes aren't going to take a consumer with bad credit and suddenly make them appear as if they have good credit."
Rather, for consumers whose credit scores sit on the threshold between poor, adequate, or good, the expected boost could make a difference in terms of required down payments or interest rates.
The Score 9 model also promises to help lenders make decisions on consumers with little to no credit history—though McBride doesn't expect to see an immediate impact in mortgage approvals for credit-lacking millennials.
However, if those young consumers have an easier time securing lines on smaller loans, however, that could balloon out into the mortgage space in the future.
"You [have to] knock over the dominoes," McBride said.