Millions Get More Access to Credit as New FICO Criteria Helps Borrowers; Financial Literacy Central to Impact

Financial education proponents are voicing concern about the potential negative impact of a new formula for calculating the most widely used credit scores, which will ignore old unpaid debts that are later paid off, while lowering the weight afforded to bad medical debts, among other changes. Their concern is that greater access to credit could have negative implications for individuals who are less financially educated and who may not fully understand the risks of loans or how to best manage their personal financial affairs.

The new formula would likely increase the credit scores of millions of credit seekers, which would result in their easier time in securing loans. FICO scores are used by approximately ninety percent of U.S. lenders. Since more than half of all bad debt collections on credit reports relate to medical bills, FICO believes the new formula will help consumers access credit when their credit backgrounds have been disproportionately impacted by medical-related credit issues.

In the aftermath of the financial and economic calamity of recent years, and amid the rising student debt crisis, many believe that making it easier for cash-strapped consumers to access credit has inherent risks. Financial illiteracy has been a major driver of poor financial decision-making and providing more credit to those who may be less well-equipped to manage loans and debt could ultimately put them in even worse financial situations.

Those concerned can take some solace in the fact that it could be years before lenders adopt the new FICO scoring system. FICO's previous version was released in 2008 and adoption was slow, as it is just now reaching a critical mass among lender use.

Financial literacy advocates are promulgating the importance of greater financial education as the new FICO formula takes effect. To the extent this development sparks a more intensified focus on financial education products and services to enable individuals and families to understand and benefit from the FICO formula change, it then could potentially bode well for those consumers and for the financial literacy movement generally.