COULD THIS BE THE TURNING POINT IN CREDIT SCORING?

FICO scores will be rescored as of the fall of 2014.  For a long time, unpaid collection accounts have been the thorn in the sides of many borrowers looking to purchase their first home.  They have unknown unpaid bills appearing on their credit report causing their scores to plummet.  Many of these are final utility bills that have never been forwarded to the borrower's new address, and more are from hospital bills that were never paid by their medical insurance carriers. Some collection accounts are called charge-offs, because they may have had a car loan or a revolving charge card that went unpaid for a long period of time. After this period of non payment, the creditor places the account in an inactive status, and they write the debt off their books as being "unable to be collected".
As of this fall, the scoring agencies are revamping their scoring models, and changing the way that borrowers will be assessed.

Medical collection accounts will  not count against a person's credit score.  For years, whenever mortgage underwriters saw medical collection accounts on a person's credit report, they overlooked them in determining a borrower's willingness to pay bills.  When underwriters had the ability to overlook these, regardless of their impact on a borrower's credit scores, loans continued to get approved, and subsequently many buyers purchased homes.  Since the real estate market contraction in 2008, many lenders haven't had the ability to approve these types of buyers. This is due to the fact that these same underwriters who were approving borrowers manually, who had decent credit but outstanding medical bills, were unable to approve them with a lower credit score.  As soon as a medical collection appeared on a report, the credit score would drop anywhere between 50-125 points, depending on the number of bills and good credit references appearing on a person's overall credit report.  For instance, if a buyer has 12 references, all good, with low balances on their credit cards, but one medical collection account suddenly appears on their report, I've seen scores drop from 725 to 650 and lower. Needless to say, this inability to overlook these accounts took many potential buyers out of the market. From this point forward, any medical bills appearing on the credit reports will not affect a borrower's credit score at all.

Up until now, paying off other types of collection accounts have had no impact on a person's credit score.  I have been heavily involved in helping people rehab their credit in the hopes of turning them into future home buyers.  I've seen people improve their scores very rapidly, with the help of paying down debt, disputing late payments, etc. The frustrating part has always been that paying off collection accounts, and charge-offs haven't had a positive affect on their credit scores.  Even though the potential buyers were doing the right thing, doing so didn't benefit them in any way.  With the latest changes to the credit scoring algorithms, paying off collection accounts and charge-offs will boost their scores by as much as 50 points.  This affirms to a borrower that by doing the right thing they will benefit, and eventually realize the dream of becoming  homeowners.

Andy Williams
President
Abacus Regional Mortgage
NMLS 118317
(484) 695-5972