By Teresa McUsic
Two recent changes to credit scores may eventually help millions of Americans with medical debts or who live in rental property.
In August, Fair Isaac Co. announced its FICO 9 credit score, a new method to assess consumer collection information that bypasses paid collection agency accounts and differentiates medical from non-medical collection agency accounts.
The new formula will cause medical collections—which are on 64 million credit reports in this country—to have a lower impact on the score, company officials said. The average FICO score for consumers whose only major negative references are medical collections will increase by 25 points, according to the company.
At the same time, Experian and TransUnion are now allowing rental agreements to be part of credit reports, even though the lease is not technically a line of credit. In a recent study of renters, Experian said the average VantageScore score change was an increase of 29 points and particularly improved the scores of sub-prime consumers. Previously, rental agreements showed up on a credit score only when negative rental payment data, such as rental collections, was reported to credit reporting agencies.
Raising credit scores can lead not only to access to mortgages, auto loans and credit cards, but can lead to savings in insurance premiums and lower interest rates on loans.
While the FICO score is used in 90 percent of all consumer lending decisions, according to Fair Isaac, it likely won’t be adopted until 2015, if then, said David Motley, president of Colonial Savings in Fort Worth.
“Most mortgage lenders adhere to the requirements of Fannie Mae and Freddie Mac,” he said. “We had a conference call with Fannie Mae this week and they said that right now they are not going to adopt the new FICO scoring.”
Medical debt shows up in one of four clients seeking housing counseling at Housing Opportunities in Fort Worth, said David O’Brien Jr., executive director of the HUD-approved counseling service.
“I would hope the industry would eventually adopt it,” he said. “If I charge too much on a credit card or spend too much at Macy’s that’s one thing. But a medical debt is not a debt of choice.”
Adoption of the new FICO score would require a substantial change in the automated systems that many financial institutions may resist, said Curtis Arnold, founder of CardRatings.com, an online service to help consumers find the best credit card offers.
“Only about half of the lenders are using FICO 8 which has been out for several years,” he said.
However, the credit card market is highly competitive, and those who do adopt the system will have access to more clients, Curtis said. In addition, consumers getting better scores will be able to realize lower interest rates on credit cards by several interest points, he added.
Virtually all credit card issuers look at credit scores, Curtis said.
“The 100 pound gorilla in the room is your credit score in determining your interest rate,” he said. “Any time you can increase your score, you should.”
Curtis recommend that consumers with medical debt who plan on getting a loan soon get their FICO score now at MyFico.com ($19.95 per bureau report), then again in a few months, to see if they have noticed a change with the new formula. Consumers can also get a free credit score from another of Curtis’s web services, WisePiggy.com, which is based on their TransUnion score. (Users must sign up for the free score, but only the last four digits of your Social Security number are required.)
Renters also may see an increase in their credit scores with the new scoring by Experian and TransUnion that can include rental agreement. Both are teaming up with RentTrack, a service that enables tenants across the country to pay their rents online and have their monthly payments included in their credit reports.
But renters with a good history of paying on time have always had that factored into mortgage agreements for those with a thin credit file of less than three lines of credit, Motley said.
“If you can show us a history of doing something like paying rent, we can factor that in,” he said. “That’s a valuable piece of information that can extend a borrower’s profile.”
In the past, lenders would ask the credit bureau to contact the landlord and get a report on their rental history, Motley said.
“Having the credit bureaus incorporating that into the credit report would be helpful,” he said. “It would automate something we already do.”
Today, around 104 million Americans rent their housing, or about 33 percent of the population, according to the National Multifamily Housing Counsel.
“With the Dodd Frank Act, requirements are stiffer for people to get a mortgage,” O’Brien said. “You could be in a cash business and live within your means and be fine until you want to buy a house. Then you’d be dead in the water.”
O’Brien said he hopes the new methods by the credit bureaus will help streamline the process of counting rent as a non-traditional form of credit.
“We do have people with a good rental history,” he said. “But the problem comes if they rent from landlords not reporting to the credit bureaus. This new system could be potential helpful but the proof will be in the pudding.”
How Credit Scores Affect Household Costs in Texas:
* A 30-year fixed home mortgage in Texas today would have an annual percentage interest rate of 3.79 percent for those with a FICO score above 760, according to Fair Isaac. Those in the state with scores in the lowest range of 620-639 would have an APR of 5.38 percent.
* A three-year auto loan in Texas today would have an APR of 3.34 percent for those with FICO scores above 760. For those with scores of 500-589, the APR would be 17 percent.
* A Texas homeowners with poor credit will pay 147 percent more for homeowner’s insurance than Texas homeowners with excellent credit, according to a recent study by InsuranceQuotes.com. Texas homeowners with fair credit pay 50 percent more for homeowner's insurance than Texas homeowners with excellent credit.
For a good calculator on the costs of long-term care over time, go to Genworth’s website, www.longtermcareinsurance.org.
Teresa McUsic’s column appears Saturdays in the Fort Worth Star-Telegram. She can be reached at TMcUsic@SavvyConsumer.net