Medical vs. Non-Medical Delinquency
By: Gordon Thomson
There’s been a recent study released by the Consumer Financial Protection Bureau’s (CFPB) Office of Research about how medical debt collections are reflected on the credit records that nationwide credit agencies maintain.
By: Gordon Thomson
There’s been a recent study released by the Consumer Financial Protection Bureau’s (CFPB) Office of Research about how medical debt collections are reflected on the credit records that nationwide credit agencies maintain.
it’s quite an amazing find for those who are suffering in the midst of a financial crisis and trying to decide which bills to begin paying off first - that will affect your credit score best.
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 nonmedical collection accounts.
According to the study by the CFPB over half of all collections on credit reports are associated with medical bills.
“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer’s credit score,” said CFPB Director Richard Cordray. “Given the role that credit scores play in consumers’ lives, it’s important that they predict the creditworthiness of a consumer as precisely as possible.”
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 nonmedical collection accounts.
According to the study by the CFPB over half of all collections on credit reports are associated with medical bills.
“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer’s credit score,” said CFPB Director Richard Cordray. “Given the role that credit scores play in consumers’ lives, it’s important that they predict the creditworthiness of a consumer as precisely as possible.”
Medical Debts Information about unpaid medical bills is reported to the nationwide credit reporting agencies (NCRAs) from two sources. On occasion it will be reported right from the source a.k.a. by the medical service provider.
However the main source of reporting comes from is what we all hate to have, by a collection agency that has purchased the debt or been contracted to collect it.
However the main source of reporting comes from is what we all hate to have, by a collection agency that has purchased the debt or been contracted to collect it.
| Dealing With Creditors Never under any circumstance dodge your creditor and try to stay away, because it will not go away until you make it go away. | Once medical collections are reported –it is then used by credit scoring models, such as the FICO, to derive predictions about the creditworthiness of consumers. These predictions, called “credit scores,” can have a large effect on a consumer’s access to credit. And everyone knows what this means in real life – if you have a low score, higher interest, bills, less financing, etc. |
Most agencies and their scoring & rating models generally do not create a difference between medical collections and other similar debts reported by 3rd party agencies. However, the recent analysis broke down what really is happening inside those giant agency algorithms – and the truth is quite shocking to learn!
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. For example, a consumer using the CFPB’s complaint system reported a situation like this only last week:
I am an insured individual, yet I have had issues with proper billing practices at hospitals. Twice this has resulted in collections being reported to the credit bureaus on bills that were not properly submitted to my insurer and that were not communicated to me as a patient. Once I tried to resolve these issues, the hospital billing departments are not helpful and the collection agencies are impossible to track down. There’s so much focus today on affordable health care and insurance coverage, yet hospitals cannot properly bill those patients who do have insurance.
If consumers are unaware of their medical collections or they view them as illegitimate because they are charges their insurance should have paid
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/
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. For example, a consumer using the CFPB’s complaint system reported a situation like this only last week:
I am an insured individual, yet I have had issues with proper billing practices at hospitals. Twice this has resulted in collections being reported to the credit bureaus on bills that were not properly submitted to my insurer and that were not communicated to me as a patient. Once I tried to resolve these issues, the hospital billing departments are not helpful and the collection agencies are impossible to track down. There’s so much focus today on affordable health care and insurance coverage, yet hospitals cannot properly bill those patients who do have insurance.
If consumers are unaware of their medical collections or they view them as illegitimate because they are charges their insurance should have paid
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/
