Fair Isaacs Corp., a credit-scoring company more commonly known as “FICO,” is used by mortgage underwriters to help determine credit risk when reviewing applications. FICO scores range from 300 to 850—with a higher score typically resulting in a lower interest rate.
FICO just announced there are some changes in the works. Beginning this fall, there will be three modifications that could instantly improve your credit score:
- Overdue medical bills will have a lessened impact on your credit rating
- Settled bad debt will no longer affect your FICO score
- And if you have only a limited credit history, FICO will evaluate it using a new algorithm—potentially resulting in a higher credit score
So just how much could your FICO rating improve?
If your only blemish is an unpaid medical bill, you could see your score increase 25 points (or more). Even this small jump could make a huge difference. Because while a borrower with a FICO score of 675 might qualify for a 4.75% interest rate, a homebuyer with a 700 FICO could see a 4.21% interest rate. And the difference of 54 basis points on a mortgage could save you thousands of dollars in interest over the life of your loan.
With over 64 million Americans having a medical collection item on their credit report, this change has the potential to increase the number of approved mortgage applications and lower interest rates for borrowers. Plus, the new algorithm could spur a rise in first-time homebuyers who have yet to establish an extensive credit history.
Regardless of your current credit score, these adjustments could positively impact everyone across the board. And the best part is you don’t have to lift a finger or file any paperwork—FICO is slated to implement changes beginning this fall.