MEDICAL DEBT AND CREDIT SCORES
The formula for calculating the most widely used credit scores will soon change to lessen the impact of bad medical debts and ignore old unpaid debts of any type that are later paid off.
FICO, which reportedly is used by 90 percent of U.S. lenders, said recently its new model offers “a more nuanced way to assess consumer collection information.” It places less significance on paid collection agency accounts and differentiates medical from non-medical collection accounts.
According to the study by the CFPB over half of all collections on credit reports are associated with medical bills.
What The Reports Said… The use of medical collections in credit scoring models has generated concerns stemming from the unique circumstances under which these debts arise and come to be reported to the NCRAs.3 Among their unique characteristics is that consumers may sometimes be unaware that the medical collections exist.
The Report show-cased an examination of whether medical and non-medical bills are of equal value when performing their predictions inside the computer system – thus determining how “worthy” you are of credit. Surprisingly, the answer appears to be “they are not equal.” The results suggested that people with more medical than non-medical bills had observed delinquency rates that were comparable to those of consumers with credit scores about 10+ points higher.
Also, the median FICO score for consumers whose only major black marks are unpaid medical debts is expected to increase by 25 points on a scale of 300 to 850, according to FICO.
So what all does this mean in terms of reducing your debt and improving your credit score? Basically, if you have medical & NON medical bills – the best course to take is pay off the non-medical first, then work towards the medical by paying off the smaller bills, then working up to the larger ones. This will reduce the number of delinquent accounts and leave the larger debts that are most likely medical bills which according to the new FICO models may actually increase your score.
If you want to learn more read the full CFPB report: http://www.consumerfinance.gov/reports/data-point-medical-debt-and-credit-scores/
The formula for calculating the most widely used credit scores will soon change to lessen the impact of bad medical debts and ignore old unpaid debts of any type that are later paid off.
FICO, which reportedly is used by 90 percent of U.S. lenders, said recently its new model offers “a more nuanced way to assess consumer collection information.” It places less significance on paid collection agency accounts and differentiates medical from non-medical collection accounts.
According to the study by the CFPB over half of all collections on credit reports are associated with medical bills.
What The Reports Said… The use of medical collections in credit scoring models has generated concerns stemming from the unique circumstances under which these debts arise and come to be reported to the NCRAs.3 Among their unique characteristics is that consumers may sometimes be unaware that the medical collections exist.
The Report show-cased an examination of whether medical and non-medical bills are of equal value when performing their predictions inside the computer system – thus determining how “worthy” you are of credit. Surprisingly, the answer appears to be “they are not equal.” The results suggested that people with more medical than non-medical bills had observed delinquency rates that were comparable to those of consumers with credit scores about 10+ points higher.
Also, the median FICO score for consumers whose only major black marks are unpaid medical debts is expected to increase by 25 points on a scale of 300 to 850, according to FICO.
So what all does this mean in terms of reducing your debt and improving your credit score? Basically, if you have medical & NON medical bills – the best course to take is pay off the non-medical first, then work towards the medical by paying off the smaller bills, then working up to the larger ones. This will reduce the number of delinquent accounts and leave the larger debts that are most likely medical bills which according to the new FICO models may actually increase your score.
If you want to learn more read the full CFPB report: http://www.consumerfinance.gov/reports/data-point-medical-debt-and-credit-scores/
