Fair Isaac Corporation's new credit scoring model has been a boon to sole proprietors.
FICO recently made changes to the way it calculates credit scores by minimizing the impact of medical debt, according to Inc. Sole proprietors' businesses are usually linked to their creditworthiness, so when their scores go up – as they did following FICO's change of methodology – more loans are granted.
FICO is the most widely used score, and so the change to the way medical debt is treated has had a big effect on credit scores, Bloomberg explained. For borrowers such as small businesses whose only blemish on their record is medical debt, the median score is expected to go up by 25. The changed scoring model is meant to depict a more accurate picture of consumers' financial responsibility.
"We have seen an improvement in their scores. It's not dramatic, but it's enough to shift them up a credit bucket," Robert Rasmussen, chief operating officer of Balboa, a lender that has experienced an increase in loan qualifications recently, told Inc.
A 25 point swing could change everything
For small businesses, a change like the 25 point one can be significant in terms of whether or not their applications are approved or denied. This could also mean the difference between low or high rates on a loan. Rasmussen told Inc. that an increase from 630 to 670 could drop interest rates by up to two percentage points, while the twenty point swing between 620 and 640 could mean approval or rejection.
Moira Vahey, a spokeswoman for the Consumer Financial Protection Bureau, said that studies have shown many Americans are overly penalized each year because of their medical debt.
"Given the critical role that credit scores play in consumers' lives, we welcome steps by industry to adjust how it weighs medical debt in order to be as precise as possible in predicting the creditworthiness of a consumer," she said in a statement, according to Bloomberg.
Rasmussen told Inc. that medical debt isn't indicative of a business owner's ability to repay other transactions. Since August, when FICO announced the change in methodology, scores have gone up about five points, he told the publication. There have been other factors that have played a role in that increase, he said, but the changes FICO has made have definitely had an impact.
In order to learn more about the effect the change to FICO's scoring could have on your business' ability to get a loan, consult a financial services expert.