FICO's New Credit Score Addresses Medical Debt Collection and Collection Agency Accounts

Business analytics and consumer credit score provider FICO announced Thursday that it has recalibrated its popular FICO Score formula to reflect a “more nuanced way to assess consumer collection information.”

To do this, FICO said that the newest iteration of its scoring product, FICO Score 9, will offer a sophisticated treatment differentiating medical from non-medical collection agency accounts. “This will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent,” the company said.

FICO also said that FICO Score 9 will bypass paid collection agency accounts. If a collection agency reports an account of any type as being paid or settled, that mark will no longer be considered derogatory.

FICO said that the new enhancements will help lenders better judge consumer creditworthiness and benefit consumers. It noted that under the new scoring formula, FICO Scores for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.

The adjustments come shortly after a report from the CFPB on the impact of medical accounts on consumers’ credit scores.

In May, the CFPB released a research report that found consumers’ credit scores may be overly penalized for medical debt that goes into collections and shows up on their credit report. According to the study, credit scoring models may underestimate the creditworthiness of consumers who owe medical debt in collections.

Congress has also turned its attention to medical debt on credit reports. A bill was introduced in the U.S. House last year that would give patients behind on medical bills up to 120 days to work with debt collectors before the debt shows up on the consumer’s credit report.

Another bill currently under consideration in both chambers, the “Medical Debt Responsibility Act,” would require credit bureaus to delete reports of any delinquent medical debt within 45 days after it is resolved. In 2012, it received a hearing by the House Committee on Financial Institutions and Consumer Credit, but never made it out of committee to a vote on the floor.

FICO Score 9 also supports the desire of lenders to better assess the risk of consumers with limited credit history – so-called thin files. In the model development process, FICO data scientists represented a consumer’s repayment behavior in degrees of risk.

For example, instead of classifying a consumer as someone who paid or didn’t pay her bills in absolute terms, the various degrees of the consumer’s payment history have been quantified.  The end result is a score with an improved ability to assess the risk of thin files.

The new scores will be available to lenders and credit reporting agencies in the fall, the company said.