Let’s start with FICO Score 2 first:
FICO Score 2 was created in 2000 and almost all mortgage brokers have been using that ever since.
It addresses the collection accounts of companies that are dealing with some serious issues, although it also works with missed payments of minor utility, telecom or medical collections.
Depending on what is the initial score, many points (up to 110) can drop in their credit scores, and it usually takes a long time to recover from this.
The worst part is that their credit scores can drop down even further as a result of negative reported information through an underwriter condition.
When they attempt to settle or pay the account, it jeopardizes the loan as being ineligible.
Lenders normally check out a credit report before they finalize the documents of financial loans.
And now, FICO Score 9:
FICO Score 9, on the other hand, practically pay no attention to any credit rating record of someone who failed to pay a debt, as soon as it has been settled or paid with a debt collection company.
To put it simply, if we use the same situation above, it is easy to regain the 110 points lost if this updated version of FICO score is used.
Having said that, negative records will stay on the credit files, regardless of it not having an effect on credit ratings.
Take note that this can vary depending on the state.
For this reason, it is advisable to pay the collection account only after its complete removal from the credit history.
FICO Score 9 minimizes the negative effect of medical debt
This unfortunate story is quite common; Some home buyers had no idea whatsoever about a medical debt that should be paid by an insurance provider, but turn out as a collection, in default and reported to the three credit rating agencies (CRAs), meaning a higher monthly interest for these home buyers.
As stated by the credit reports industry, there are approximately 65 million people have medical collections on their credit profile.
And, about 9 million individuals have zero balance, although their credit scores have been suffering still.
The CFPB (Consumer Financial Protection Bureau) had a crucial role to play In 2014 for the developers at FICO, which was to accept the expensive medical emergency expenses that can happen to responsible individuals but with limited means.
With the current FICO Score 9 version, it now gives consideration to the unpaid medical bills from the collection agency reports, showing leniency and only minor negative effect on the credit rating of a person.
FICO Score 9 provides various options to the millennials with regards to home ownership
The thin file treatment is considered the credit score’s most beneficial upgrade, unfortunately has been ignored by the industry authorities.
In the past, the FICO scores required about two or three active credit accounts (also known as trade lines) in order to get a score.
The good news is, FICO 9 is contented with even just one credit account that has been used at least one time during the past 6 months.
This new FICO version becomes popular with most millennials, especially those who have limited credit ratings and trade lines, as these are usually the factors that hindered them form buying houses.
What are the changes?
1.Changes in unpaid medical debts
About 64 million People in America have a medical collection file on a credit agency. In today’s times, it can drastically hurt their FICO score. In a case of unpaid medical expenses, it is usually reported in two ways:
- A external debt collection firm that is responsible to collect the debt can report it.
- The medical agency can also report it.
The majority of these cases are reported by debt collection agencies. And so, if a doctor is trying to get in touch with you about your bills, it most likely has not been known to a bureau.
But, if the call is from a debt collection company, expect to see a negative score on them.
The objective of a credit score is to make lenders see the advantages of paying back a debt responsibly and on time.
A report in May 2014 stated that people have been wrongly penalized due to their medical bills, and CFPB has verified it.
FICO is now in agreement with the CFPB. With the new credit score, the medical collections are segregated from the non-medical ones. And with this, people will not receive full punishment.
It seems logical for these reasons:
1. The medical industry is a complex system, and a lot of people do not even know that they owe some medical collections. It can be from a minor copayment that wound up in a collection bureau.
2. In the past, a great number of people were not able to acquire insurance due to a pre-existing obligation. In the event that a medical disaster occurs, they could not possibly pay the bills, no matter how responsible they are.
3. Despite having an insurance, there will be huge deductible fees when it comes to several emergency situations in a family. Hospitals and doctors can easily transfer the bills to the debt collection firms, creating a negative review on the bureau.
Obviously, the CFPB deserves an applause for this. They have presented an ideal formula for the industry, which the industry also liked.
The outcome is expected to create easy access and lower rates to credit.
2.Dodging Paid Collection Accounts
There are other kinds of debts that can land on your credit agency. It may be a phone bill, overdraft or utility bill, which can contribute to your account ending up in a collection company.
These debt accounts can badly hurt your rating.
Many people find it consuming in cases where they have recovered from a debt, but are debating whether to pay back their four-year- old collection or just allow it to age.
Would it appear to be a recent activity on their collection item once they pay it back now.
No more uncertainty and ambiguity with this version. The bottom line, your score will increase by paying back your debt collection items.
3.Your credit history will still have your ignored collections
Okay, it is a good thing that a collection with zero balance will be unnoticed. But, know that such collection is going to be visible on your credit history, that is until it reaches the seven-year report limit.
Lending firms obviously have more concerns and issues when it comes to debts that have ended up in collections, even if they are already paid.
And these lenders have the power to deny an individual a credit or give them with less beneficial terms.
4.Residential rental record makes a difference
Experian has recently began including residential rental record to their credit card reports. After that, TransUnion revealed that they will follow suit.
This is a favorable opportunity for people who promptly pay their apartment rent and want them to reflect on their credit reports. The FICO score versions before did not give consideration to rental trade lines, regardless if they were on the credit history.
FICO 9 offers considerations on such accounts.
When will it take effect?
The sad news is it will take some time to be effective. FICO basically sells their credit rating to banks. So, it depends on a bank whether to upgrade or not, every time a new credit score is added.
The first thing they do is conduct a classic analysis.
They will check past the portfolio history for a few years back, and then assess the effect of a new score to the portfolio.
The process usually takes from 12 to 18 months. They utilizes methods, including the cutoff, the rates as well as implement additional rules.
It pays to know that banks are generally eager to debt swap new clients.
Which means that, if the rejected customers who have been denied before can now be qualified, the banks will be more than willing to continue.
These banks are less eager to charge consumers much lower interests. And this is where the CFPB enters the picture.
They closely keep an eye on the banks. If consumers are in fact lower risk, then they should pay lower rates. Even so, banks are not willing to decrease their rates.
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