What the New Credit Card Formula Means for Your Wallet

By Tim Lemke. Last updated 22 December 2014. 0 comments

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FICO, the company that provides information to the three major credit bureaus, has made changes that could potentially lead to higher credit scores for millions of Americans.

The changes announced in August from Fair Isaac (FICO) could help those dealing with medical debt, and will also give a boost to people who were dinged with collections but paid off the related debts.

Here's a look at what the changes mean for you.

Medical Bills Won't Hurt You as Much

FICO said that if you are someone whose only negative references are for medical collections, your score will rise an average of 25 points. FICO said it will use a "more sophisticated treatment" to determine the difference between medical and non-medical collections. In essence, FICO learned that many borrowers have medical debt, but that it's not necessarily an indicator that they won't pay back other monies owed. Critics of previous rules said penalizing people for medical debt was unfair, because patients often don't know what they owe hospitals and doctors and high medical fees combined with limited insurance coverage can be catastrophic to people's budgets.

Collections Won't Be Viewed Badly, as Long as You Eventually Paid

Under previous rules, borrowers saw their credit scores go down if there was any record of a collection — even if they eventually paid the debt off in full. In fact, those collections stayed on a person's record as long as seven years, even if they had no other unpaid debts. Now, getting a visit from a collection agency won't hurt you, as long as you pay whatever was owed. The Wall Street Journal reports that about one in ten people who had a collection now have no balance at all. (See also: Best Secured Credit Cards to Rebuild Credit)

Borrowing Should Be Easier

In general, these changes should cause credit scores to go up for most people. That means more people could qualify for loans and credit cards, and those who could already borrow will now get access to lower interest rates. But be careful: Just because you're eligible to borrow more money doesn't mean it's necessarily wise to do so.

In an interview with the Wall Street Journal, one lawyer specializing in consumer protection warned of the possible negative consequences.

"A lot of people really just can't handle credit — you're not really helping them by allowing them to dig themselves into debt," Howard Strong, a lawyer in Tarzana, California, told the newspaper. "It's like a sharp knife — if you don't know how to use it, you can cut yourself."

For Those With a Thin Credit History, It Could Go Either Way

If you're just starting to build your credit, you have what FICO refers to as a "thin file." Previously, those with "thin files" were judged in absolute terms — you either paid your bills or you didn't. Now, FICO has the ability to analyze new borrowers in a more nuanced way. Depending on your payment history, this could improve your score or cause it to go down. If you've been great about paying your bills, even if you have a thin file, you'll probably be unaffected. On the flipside, you probably won't see your score improve if you've missed a lot of payments. It's those folks in the middle that may see an adjustment.

It May Not Impact Anything Right Away

FICO is hoping all three credit bureaus adopt the new scores this year. But it will take some time for lenders to adjust their policies. FICO said it will begin educating lenders now in the hopes they will be on board with the changes later in 2015.

It's Still up to the Lender

The FICO Score 9 is not the only score that lenders can look at. The Wall Street Journal reported that there are about 45 different kinds of scores that lenders can look at, depending on the type of loan a borrower may be seeking. And even if they do look at the new FICO score and like what they see, they might still deny your loan for other reasons.

None of This Matters If You're Awesome

These changes to FICO scores could have an enormous positive impact for those with debt. But if you use credit responsibly by paying bills in full and on time, you probably already have great credit and won't notice much of a change.

Do you expect the new FICO formula to change your credit score? Or are you already awesome?

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Guest's picture

I recently applied for a credit card at Filene's to
receive 20% off the selling price of an item in turn my Credit score Went down 17 points originally my score is over 800 I have a payment history Of 100% I recently payed the new card off and payed 2 other card off with O balance the what can I do to bring my score back up