NEW YORK (TheStreet) — Tough lending standards introduced after the financial crisis have barred millions with tarnished credit from buying a home, trading up or refinancing. But a few would-be borrowers may soon find the door opening a crack — assuming their financial problems relate to medical bills.
FICO, the credit rating firm, says procedures to be in place by year end will be a bit more forgiving of people who have been targets of debt collectors, so long as the trouble concerned medical bills. In other words, your credit score will be hurt less by a bad debt to a hospital than one to a car dealer or credit card company.
Credit scores are based on factors such as a person's debts, credit lines and payment history to gauge the odds the person will default in the future. FICO's move, part of a new credit rating process called FICO Score 9, recognizes that a bad debt due to a medical issue, which typically comes from bad luck rather than bad judgment, does not necessarily mean the individual is a poor risk. The approach should be especially beneficial to borrowers with thin credit histories, FICO said.
"For example, instead of classifying a consumer as someone who paid or didn't pay her bills in absolute terms, the various degrees of the consumer's payment history have been quantified," FICO said in a press release. "The end result is a score with an improved ability to assess the risk of thin files."