Millions of consumers with low FICO scores are about to get a boost and access to lower cost loans.

Announcing a “a more nuanced way to assess consumer collection information,” the Fair Issac Corporation’s new model number nine for calculating a consumer’s FICO score will no longer include a ding for any bills that ended up in collections but have since been paid or settled.

In addition, unpaid medical bills will now have a lower impact on a consumer’s credit score.  The median FICO Score for consumers whose only major derogatory mark are unpaid medical debts are “expected to increase by 25 points.”

Unfortunately, many mortgage lenders are still using older models of the FICO Score calculator.  But if unpaid medical bills or old collection agency debts which have since been settled have been keeping you from securing a mortgage, or paying a higher rate, it might be worth shopping around.

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Comments from “Plugged-In” Readers

  1. Posted by san FronziScheme (formerly known as lol)

    I hope people who got foreclosed in the 2007-2011 downturn still have a major ding. We do not want them to come close to a mortgage application document anytime soon.

    • Posted by Futurist

      I agree. The rules for borrowing are way too sloppy. Many of these foreclosed folks (and I know a few) pulled money out to buy a big fat car or boat or rv or take a trip to Europe. No sympathy from me.

      • Posted by VictorC

        So if you bought a house, moved for work, the price of your property dropped by 50%, you keep paying your mortgage and you are trying to short-sale your property to your tenant but the bank refused to approve the short sale, and then you finally walk away from the property after spending months trying to find a real solution… you hope those people still have a major ding?

        • Posted by san FronziScheme (formerly known as lol)

          I would say yes. A credit rating doesn’t only tell if you pay your bills on time, bt if you put yourself in situations that will cause risk to the lenders.

          If your property lost 50% this might not be totally your fault. There are still 2 things that you could have control over: how much you paid and how much you borrowed. If you paid bubble price with 5% down, your credit shouldn’t be doing as well as the guy who waited 3 years to pay 50% less and put 25% down. It catches up on you sometimes, and that’s the purpose of the whole thing.

        • Posted by Futurist

          Yup. No sympathy whatsoever. Being responsible means just that.

        • Posted by Sierrajeff

          Thanks, VictorC – I was one of those people – 20% down on a house in a Southwestern market when we moved there (i.e., not for speculation); put 6-figures of equity into renovations, upgraded all systems (home built in 1939), etc., essentially doubling the homes’ value. (Heck, I’m the sort of person who even made extra mortgage payments.) … 6 months later came Lehman, and the home lost 50% of value. I kept making payments for 2 years, then had opportunity to move back to Bay Area. I tried working with the bank – calling them in advance to try to work something out – but from the first words out of their mouth they were combative and abusive, and unwilling to even consider talking about a short sale *unless and until* I was in default. So excuse me for not suborning my life to the debt, for not shackling myself to the house until its net value someday clawed its way back to zero. (And after all, the bank made the same analysis that I did, that the house was adequate consideration for the loan.)

          I’m not talking about, or defending, those 105% loan, zero equity people. (Or banks that lent to them, though the latter appear to be getting off scott-free.) But if someone did everything right and got the economy ripped out from under them, they shouldn’t be barred from the market forever.

          • Posted by san FronziScheme (formerly known as lol)

            Sierrajeff,
            No one can blame you. When everyone does the same thing it is hard to know what is really going on.
            What I look at before buying any place: What was the situation 5 years ago? If the price is double what it was 5 years ago, are the people in the zip code making twice more than 5 years ago? Are there actual real forces that justify this increase? With that type of thinking that would prevent you from buying anything between 2003 and 2009. This is exactly what happened to me. My last purchase before the meltdown was early 2003. It took 7 years before I decided to purchase again. SFRentier says I am cautious like a 70 year old, and I am very very far from 70. But for me discipline in financial matters is the key to keeping my family safe.

            Now do you deserve a ding in your credit for it? If there is no ding then there will be no hard reminder of that caused the Great Recession. It is often random and unjust, but suffering needs to happen in order to etch the foolishness of the mother-of-all-bubbles into people’s flesh.

        • Posted by JR "Bob" Dobbs

          I’ll defend those “those 105% loan, zero equity people.” They did nothing wrong, in my book. They were presented with a proposed deal: no risk, no money down (and even cash handed to you!), if the value goes up they get to keep all the gains, if the value goes down they can just walk away. So they took it! You think the bankers, brokers, private equity guys, etc. wouldn’t take such a deal? Blame the game, not the player.

          Now, having taken that deal and walked away, they certainly deserve to have a massive credit report ding – that is also part of the game that they decided to play. And I also had zero sympathy for the millions claiming they were the “victim” of something or other in the loan or deal they signed onto. BS.

          Credit bureaus exist as a tool to predict the credit risk in lending to a person. Anyone who failed to repay a loan for whatever reason is going to take a hit, and should, even if they were “innocent” in failing to repay.

          • Posted by san FronziScheme (formerly known as lol)

            I would agree whole heartily if the aftermath of the bubble hadn’t caused the US sequester, the idiotic EU austerianism, the Tea Party (I was watching the CNBC Rick Santelli rant live and thought F*** Yeah! Then the crooks took this legitimate rant and turned it on its head into a crackpot conservative battle).

            All of those things wouldn’t have happened without relaxed lending. Trillions vanished and we’re still paying for it.

          • Posted by Sierrajeff

            You’re right, in the sense that even the “105% loan” people played by the rules, as they existed at the time. Their lenders knew they were making nonrecourse loans (at least, in states such as CA), and so were making the same gamble as the homeowners. In hindsight, of course it looks like an insane, indefensible gamble… but nevertheless, those lenders entered those deals every bit as willingly as the borrowers (and despite, in theory, having more and better market information than the borrowers).

  2. Posted by anon2

    What really matters is how predictive the new FICO is (or initially how predictive the lenders believe it to be). If the SAT raised everyone’s score by 25 points arbitrarily, colleges would just raise their standards by 25 point with the net effect being zero.

    It could be that having a bill going to collections and then quickly paying it off isn’t very predictive of having a major default such as on a mortgage.

    • Posted by san FronziScheme (formerly known as lol)

      true, but some things happen beyond our control. Say you wrote your kid’s tuition check and you know your account will go close to 0. Then a loved one has a major issue and you have to jump on a plane right away, paying 5 times economy class price. You are temporarily in the red and the tuition check bounces. I had something similar happening, having to shell 20K in tickets to Europe in one day, with big contractor expenses from the past 3 weeks eating up my credit card balance. Good thing my accounts were doing OK and I could pay off the CC balance right away. Anyone with a lesser cash reserve would have to take the ding then resolve it later. Am I a better credit risk than this other guy? Maybe a little yes, but not by the huge ding the other guy would be getting.

  3. Posted by inclinejj

    Banks and lenders are running out of people to buy overpriced homes! They can losen up the loan guidelines so they are doing everything they can to keep the gravy train on the tracks.

    • Posted by san FronziScheme (formerly known as lol)

      I wouldn’t call the current US housing “recovery” a gravy train. Sure the upper crust market is doing great, but it is due to what Piketty calls the “new Gilded Age” better explained as a wealth polarization at the expense of the middle class. But overall the housing market has been a bit too tepid. Homeownership rates are now where they were before the bubble.

      What you call the gravy train is actually almost the only tool that the Obama administration has to push cash into the economy. At least until the midterm elections and maybe, a big maybe he’ll be able to have a truly Keynesian program.

  4. Posted by Anon

    Lenders use Fair Issac? I don’t think so. They utilize the middle score of Equifax, TransUnion, and Experian.

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