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FICO’s New Scoring Model Nixes Medical Debt, Frees Up Small Business Credit


With small business lending, even minute changes to a person’s credit score can mean the difference between approval and rejection for a loan. Or the difference between higher interest rates and lower ones.

FICO Nixes Medical Debt

This summer, FICO announced that it would eliminate medical debt from the credit scoring process. For many small business owners, this means that their credit scores will increase, which could move them into a better credit tier. These sole proprietors are particularly impacted by the change because personal credit scores are usually applied to their businesses when they apply for loans. For example, a score of 620 could disqualify you for a loan while 640 could qualify you as a borrower.

To give you a sense of the impact, for a borrower whose only major negative credit file is an unresolved medical debt, their credit score will now increase by about 25 points. In addition, they’ll be able to borrow money at lower interest rates – moving from a score of 630 to 670 could lower your interest rate by one or two percentage points.

When FICO removed medical debt from credit scoring, the Balboa Capital Corporation, a California-based lender, saw an increase in qualifications for equipment financing loans. According to their Chief Operating Officer, “We have seen an improvement in their (applicant) scores. It’s not dramatic, but it’s enough to shift them up a credit bucket.”

Overview: FICO Score

For reference, FICO scores are a type of credit score used by banks, credit card issuers, and other lenders to make lending decisions. The scores range from 300 to 850 and predict the likelihood of a business defaulting on a loan – the higher the score, the more likely it is that a person will repay the loan on time. Out of all loans made in the US, 90% of lenders use FICO scores to determine whether they will make a loan as well as the interest rate.

Impact of Changes to FICO Scoring

According to the Balboa Capital Corporation, medical debt typically has no bearing on business performance or the business owners’ ability to pay back loans. As of July, 64.3 million consumers showed some level of unpaid medical debt on their credit reports. Changes to credit scoring, like removing medical debt, will more fairly rank the actual risks posed by loan applicants and allow more people to buy real estate and borrow money.

Will changes to FICO scoring affect your business? Leave a comment below and let us know your thoughts or tweet us @KabbageInc!



Kabbage Team

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