FICO changes may save consumers, but not much and not soon

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FICO  (Fair Issacs) (who is not "fair") the nations monopolized credit scoring company is changing the rules to reduce the negative effect of overdue medical bills and to quit penalizing consumers who pay off debts that had been assigned to collection agencies.


"Experts cautioned, however, that borrowers might have to wait for a year to see change because lenders will not quickly overhaul their systems to evaluate consumers and price loans for them." - LA Times


Some of the initial speculations claim that the new system "could make it easier for millions of Americans to get loans at lower rates and eventually save consumers billions of dollars."


Some of the news articles do point out the truth about how a better score will save you thousands of dollars. "Consumers who have FICO scores in the 720 to 850 range—850 is the maximum FICO score—currently get an average interest rate of 3.170% on 36-month car loans, according to Informa Research Services, a market-research company in Calabasas, Calif. That interest rate jumps to 4.499% on average for borrowers in the 690 to 719 range. And the interest rates rise from there, with some consumers facing rates well into double digits." - Wall Street Journal




However they are not telling you the whole story.  


Fact, their scoring system is so complex that not even bank presidents can figure out by looking at a credit report, who would have a better score. Fair Issacs, uses a complex computer program that uses algorithms to calculate the score.


They forget to tell you about 40% of your score is based on debt to credit ratio and not addressing that or other areas are not going to change your score.


They claim that consumers whose only major delinquency is (one) unpaid medical bill, "could" increase their score by 25 points, according to Fair Isaacs.  But, if you have other kinds of unpaid debt in addition to medical debt, you will likely see a smaller increase in your score -- if any at all.




Fact, they forget to tell you that if your medical bill  (or any type of bill)  goes tocollections, only part of the debt is held by the collection company.  When you pay this part off, in 3 years the rest of the medical debt is sold to another collection company and re-reported on your credit report, thus reducing your score again, and counting as a second medical collection.


Fact, just because FICO says your a low risk, the lender may look at the report and not treat the consumer as a low risk.


This may not unleash more lending or borrowing 


 Yahoo Finance Senior Columnist Michael Santoli sees the FICO action as more of a minor technical fix that might only give a small group of people access to credit.


“The bigger problem is incomes are just not there to support that much more debt, necessarily, across the board. I don’t necessarily see this as somehow unleashing a new heavy flow of credit toward consumers. It’s much more around the edges," Santoli said.


The new credit scoring model, called the FICO 9, also does not change the way lenders determine the interest rate on your loan. “This does not change banks' ability to price risk correctly," Yahoo Finance Columnist Rick Newman said. This means banks can still charge you a higher interest rate if you are at higher risk of defaulting on your loan, which means some consumers may opt out of taking out that car loan, he said. 


One big change: FICO will begin ignoring debt in collections that has been completely paid off or settled. Currently, debts that go into collections, even if they are paid off, are factored into all credit scores for up to seven years.  This is great news for people who use our services to help them to have the reported as "paid."


Fair Issacs and the bureaus are in this for the money, not the consumers. Always remember this, they are privatized monopolies that will do everything they can to make money, even if this comes to your financial life. 


Now more than ever is the time to take control of your credit score and financial life.






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