Fair Isaac Corporation, the leading credit score provider, is changing the way it scores credit and that could be good news for potential home buyers. The FICO score is the industry standard designed to tell lenders how likely it is that a consumer will repay a loan. A Consumer Financial Protection Bureau study revealed recently that consumers were being over-penalized for unpaid medical debts compared to other kinds of debt.
The new scoring model will also give less weight to paid debts that were in collection. Under the previous system, collections could impact credit scores as much as foreclosures and bankruptcies did. That is changing.
One example: A consumer with a credit score of 711 has a strong credit history but unpaid medical bills were lowering the score. The new scoring method could bring the score up to 725 and make consumers eligible for loans such as mortgages with much lower interest rates.
The home mortgage market in the second quarter improved as demand increased and many banks eased their lending standards.
Note that in August, the average interest rate on a 30-year fixed rate mortgage was 4.12 percent promoting mortgages and loans.
The changes are expected to increase lending, especially among borrowers who were shut out by high interest rates and low credit scores.
The rules are aimed at boosting lending without raising credit risk. Most consumer infractions are small. For example, they are generally on time paying their bills, but disrupted by a medical emergency. More than half of all debt-collection activity on credit reports comes from medical bills, according to the Federal Reserve.
“The new rules expand banks’ ability to make loans to people who might not have qualified, and to offer lower interest rates to others,” said Nessa Feddis, senior vice president of consumer protection and payments at the American Bankers Association.