FICO Scores Policy Changes Mean Your May Go Up
One of the standard measures for credit, the FICO scores, is about to be recalculated.
The changes in the methodology for providing FICO scores involves reducing the weight of medical bills, tax liens, and civil judgments. These changes are likely to affect 12 million Americans – the 6% of American consumers that have credit scores.
While removing adverse information would benefit debtors, critics worry that changing the scores could provide a false image of creditworthiness. The FICO score is used to determine terms for loans of every type – ranging from car loans to home loans. It is an indicator of the borrower’s ability to repay a debt. In removing information about health expenses and past defaults, credit agencies may be painting a rosier picture of borrowers than is deserved.
All 3 credit agencies, Equifax, Experian, and TransUnion are making these changes. Some changes have already been underway since July of 2016. The changes have been spurred by regulatory actions for increasing the accuracy of reporting in credit reports. Groups like the Consumer Financial Protection Bureau have noted that inaccurate information can affect job applicants and housing choice. The changes made to the credit scoring methodology are part of an implementation of new guidelines set forth for credit agencies. The National Consumer Assistance Plan was brokered in 2015 through a settlement with 31 state attorney generals. The credit agencies were given 3 years to rollout all of the changes advised through the new policy.
There is validity to views by both the critics and supporters of the FICO score changes. Civil judgment data will only be removed in instances when there is missing information like names, addresses, and birth dates. In 2011, more than 8 million complaints about incorrect information were received by the three major credit bureaus. Credit scores will increase on average 8-20 points, a number that some feel is negligible. While removing some adverse information gives scores a boost, the entire credit history is still being reviewed and weighted for delinquencies and defaults. Payment history is still an important part of the score – weighted at 35%.