FICO No Longer Considering Unpaid Bills, Once They Are Settled

In a move that should sharply boost—some might say inflate—consumer credit scores, FICO on Thursday (Aug. 7) changed its policy and will no longer consider an unpaid or late bill, once that bill “has been paid or settled with a collection agency,” The Wall Street Journal reported.
The report said that FICO will also “give less weight to unpaid medical bills that are with a collection agency.”

“The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk. Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report,” the story said. “The changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores.”

To the extent that this change encourages more home purchases and other major purchases, it good give a boost to the economy. But there is also a risk. If this allows consumers to borrow more than their fiscal habits warrant, it could lead to the same kind of increases in defaults that crippled the housing market a few years ago.

“A lot of people really just can’t handle credit—you’re not really helping them by allowing them to dig themselves into debt,” Howard Strong, a lawyer in Tarzana, Calif., told The Journal. “It’s like a sharp knife. If you don’t know how to use it, you can cut yourself.”

The medical change is somewhat more complicated. The Journal pointed out that “consumers often are unaware that their insurance company isn’t paying a medical bill and can end up in default and in collection without knowing it.” FICO scores suggest/imply that the consumers engaged in these moves knowingly and deliberately. Eliminating from consideration something inadvertent is very different, akin to charging someone with driving with a suspended license—if that driver had never been told that the license had been suspended, such as with a computer glitch.