A fairer way to judge credit worthiness

A lot of people could get a little more credit where credit is due.

FICO, which creates widely used credit score systems, recently announced that its newest version will weigh medical debts less heavily. The update also will ignore any collections, not just medical ones, that have been paid by the consumer. Until now, paid collections hurt scores as much as unpaid ones.

Both changes make sense, but changing the way medical debt is reflected on credit reports is a particularly good idea: 64.3 million Americans have a medical collection on their reports.

Many consumers are stuck in the middle with a third-party payer and may not even know they owe the money, or they are disputing the bill. And racking up medical bills doesn’t really signal irresponsibility, because medical bills usually aren’t incurred by choice.

Regulators and banks suggested the tweaks. Studies by Fair Isaac Corp., the company behind FICO, and the federal Consumer Protection Financial Bureau show that unpaid medical bills don’t indicate the same level of risk as other debts.

One likely change will be that some consumers who have had a hard time borrowing — particularly after credit tightened and banks struggled after the recession — will get access to credit.

A wider improvement, though, will be lower interest rates for people who borrow now, but pay a lot for the privilege.

There is always the worry that looser standards will bring back irresponsible lending and asset bubbles, but the research suggests that won’t happen if these changes are adopted. That could take time, though, because big lenders only change their ways of rating credit when they upgrade software.

FICO says only about half of its lenders have switched over to a model it introduced back in 2008, which means, for once, the lenders are the ones who are past due.