FICO, the nation’s top provider of credit scores, announced two significant changes to their scoring formula that may provide real benefits to people in debt:
- FICO will reduce the impact that medical debt in collections has on a person’s credit score.
- FICO will also reduce the negative impact on credit scores from previously bad debts that have since been paid or settled.
That second change in particular is a big deal for student loan borrowers who have or had student loans in default. I help a lot of borrowers settle their student loans, and student loan settlement can be very helpful for those in a position to negotiate a reasonable and amicable resolution to past-due and delinquent student loan accounts. While resolving these debts is generally a good thing, it can take some time for credit scores to bounce back and fully recover, as the negative information from the defaulted student loan remains in the borrower’s credit history for several years after it has been resolved. Now, with the changes being implemented by FICO, the impact of these previously-defaulted-but-now-resolved debts will be reduced. This will allow a person’s credit score to recover more quickly after settling or paying off a delinquent or defaulted student loan, making it easier for them to obtain housing, employment, or new lines of credit.
FICO cautions that the actual impacts to credit scores will be relatively small. Nevertheless, even small improvements may be a welcome change for borrowers who took action to resolve student loan accounts that were in collections.
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