Will new FICO scores set consumers up for a fall?

by Ryan Smith11 Aug 2014
The announcement Friday that FICO would revamp the way it calculates credit scores was hailed by industry pros as good news for home ownership. But could the change actually be setting consumers up to fail?

FICO announced on Friday that under a new system, it will begin ignoring paid collection accounts and place less emphasis on unpaid medical bills when calculating credit scores. Those consumers whose only major black marks are unpaid medical bills could see their credit scores rise by as much as 25 points, according to the company.

The decision was hailed by National Association of Realtors President Steve Brown, who said it will increase consumer access to home ownership.

“This move will ultimately make a real difference in the lives of millions of Americans, who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores,” Brown said. “Since the housing crash, overly restrictive lending has been the greatest obstacle to homeownership. NAR will continue to support efforts to broaden access to credit for qualified homebuyers.”

But Rob Garver, national correspondent for the Fiscal Times, pointed out that most banks would probably consider numerous collection accounts – paid or not – to be relevant data when considering whether to offer a loan.

“In the end, the worst-case scenario is that the new scores will result in many consumers getting loans they shouldn't, landing in serious financial trouble,” Garver wrote.

However, one industry pro disagreed with Garver’s assessment. Nessa Feddis, the American Bankers Association’s senior vice president for consumer protection and payments, pointed out that all FICO had to sell was the reliability of its ratings. If the company wasn’t certain its ratings would remain reliable, Feddis told the Fiscal Times, it wouldn’t be making the changes.

“At the end of the day banks and all lenders want the most predictive score,” she said. “If it's not predictive, they won't use it.”

What do you think? Is FICO’s decision to recalculate credit ratings a boon to the mortgage industry? Or is it setting consumers up for a fall? Let us know in the comments below.

 

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