Rebuilding Your Credit? Here’s Good News

Fair Issac Corporation just announced a change in their credit scoring that’s good news for everyone working hard to rebuild credit scores after a financial disaster.
The good news comes in two parts:
First – Medical collections will be given far less weight.
The credit scoring giant has realized that medical collections are not always the fault of the consumer. Instead, they’re often the fault of the insurance companies.
It turns out that insurance companies don’t always let consumers know right away when they’re not going to cover a certain procedure – or when they’re not going to fully cover it. Worse – even “covered” charges aren’t being paid.
Thus, consumers are forwarding those medical bills on to insurers thinking they’ll be paid. Instead, they find that they have collections on their credit record. It’s a growing problem, with more than half of all debt-collection activity on credit reports being directly attributed to medical bills.
In spite of insurance, in 2012 42% of U.S. adults (75 million people) reported having trouble paying medical bills. This is a 295 increase from 2005, when 58 million were struggling.
Second – a Reward for getting those collections and past due accounts paid off…
Under the new FICO credit scoring model, bills that were past due will not be included on consumer credit reports once they’ve been paid off. Collections that have been discharged will no longer be shown.
Previously, those collections remained on a consumers report for up to 7 years – dragging down their credit scores by as much as 100 points.
FICO scores fall between a low of 300 and a high of 800, with rigid “breaking points” along the way. Just a 1 point difference can make a huge difference in the interest rate charged – or whether credit is granted at all.
The line between good and not good is at 620, and those with scores below 620 are considered high risk. From 620 to 649 is an intermediate area – “Pretty OK” – while 650 and up is considered very good and 720 is excellent.
Even then, there are differences. For example, a score of 760 could get you a rate of 3.823% on a 30 year mortgage, while a score of 759 would raise that rate to 4.045%. That doesn’t sound like much, but over the life of a 30 year mortgage it amounts to a difference of $4,588 per $100,000 of the loan. And that’s for a difference of just one point.
A difference of 100 points could raise you from “not at all good” to “very good.” And of course, the interest rates you’ll be offered will be so different that they could make the difference between being able to afford the purchase and having to walk away.
Fair Issac Corporation expects credit card issuers and automotive lenders to begin using the new system first, with mortgage lenders to follow at some time in the future.

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