Fair Isaac Corporation (FICO - Free Report) , a leading personal credit score provider, is implementing a new credit analysis scoring model, which will give less weight to unpaid medical bills. The new system will improve the credit record of many borrowers, and will also enhance the risk-assessment capability of lenders. Investors were neutral to the news as share price was flat over the subsequent trading session.
The new model, known as FICO Score 9, is supposed to make obtaining loans easier for consumers who have settled bad debt, or have overdue medical payments.
The scores of Fair Isaac, a software analytics company, are the most comprehensively used credit-scoring formula in the U.S., influencing lending decisions such as setting interest rates on home loans or issuing credit cards. The company developed FICO Score 9 after some of its biggest customers, including major lending institutions and regulators, reportedly suggested that overdue medical debt was unduly weighing on consumers’ credit scores.
Additionally, a study by the Consumer Financial Protection Bureau, based on five million anonymous credit records, revealed that consumers may have been overly penalized for medical debt compared with other types of debt.
FICO Score 9 employs sophisticated modeling techniques to make the credit scores more predictive of the consumer’s probability of repaying a debt, compared with the previous versions. The updated scoring system will attempt to place greater importance on consumers’ more recent behavior.
The scores are based on a 300–850 point scale. After the implementation of the new scoring model, a consumer’s credit score will be less affected by outstanding medical bills, making it easier for them to get credit approval. For example, those with a median score of 711 – and a strong credit history, except for outstanding medical debts – may see their FICO score increase by 25 points. Consequently, they will be eligible for more favorable interest rates on various loans, thus generating savings.
Back in Mar 2013, Fair Isaac’s major competitor VantageScore introduced “VantageScore 3.0” that excluded all paid collection accounts including medical accounts. VantageScore is a joint venture of three leading credit reporting bureaus, Equifax, Experian and TransUnion.
Available across all three credit bureaus, Fair Isaac’s new scoring model will attempt to offer a more consistent score over each.
Fair Isaac currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the information technology services industry include Amdocs Limited (DOX - Free Report) , Barracuda Networks, Inc. and Infosys Ltd. (INFY - Free Report) .