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After the Great Credit Hangover, the Party Is Slowly Starting Anew

More lending documentation requested

“What do you mean I have to fill out another form???”

A pair of articles in the Wall Street Journal this week signaled that credit scoring models and strict lending standards and are beginning to loosen. Signs of the Great Credit Hangover seem to be fading as the pendulum swings back the other way ever so slightly.

Credit Score Revamp

This year’s introduction of FICO 9, the latest iteration of the widely used credit scoring model from Fair Isaac Corp., is expected to help widen credit access. The goal of this latest version, of course, is to increase lending without increasing risk. Lenders want to expand the pool of eligible borrowers while avoiding likely deadbeats. The eternally open ended question, of course, is how?

The new model will not penalize those who do not have an outstanding balance, omit bills that have been settled with collections, and give less weight to unpaid medical debt.

That first point especially makes a lot of sense. Absent the influence of government handouts that distort the free market regulations, I would say borrowers without debt are more likely to pay back loans than those who have already demonstrated an inability to do so.

The WSJ cites Federal Reserve findings that “More than half of all debt-collections activity on consumers’ credit reports comes from medical bills…”. This encompasses an astounding 41 percent of the U.S. adult population. That’s apparently 75 million people.
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