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Shared article: Big changes in how widely used FICO credit score treats medical debt

File:FICO logo.svgConsumers whose credit has been battered by medical debt are getting relief from the credit-scoring industry.

FICO, creator of the most widely used and influential credit score, said last week that the latest version of its score will reduce the importance of overdue medical bills.

That’s good news for consumers, who often struggle to pay their medical bills. In fact, 1 in 4 U.S. families struggled to pay medical bills in 2012, and 10 percent said they had costs they couldn’t pay at all, according to the National Center for Health Statistics.

“What research has shown us is medical debt is not like other types of collections,” said Anthony Sprauve, FICO spokesman. “The score can now look at medical debt separate from other collections.”

The new version of FICO will also ignore debts that go to collection agencies and get repaid.

FICO’s two changes will have far-reaching impact.

Ten percent of debts that go into collection are paid off, Sprauve said.

“The other 90 percent are unpaid, and of that 90 percent, a little over 50 percent are unpaid medical debt, so you can see in the world of collections, medical debt is a huge issue,” he said.

“For people who have a clean credit history, it’s not an indicator of financial problems that they’re not going to be able to pay their debt. It’s an anomaly, a blip on the screen.”

FICO said its move is expected to raise the median FICO score 25 points for consumers whose only credit-record blemish is unpaid medical debts.

No expenditure can hurl you toward financial ruin as quickly as medical bills.

Experts say that even one negative medical collection mark can drop a consumer’s credit score. And that can potentially cost the consumer thousands of dollars in higher interest rates on home and automobile loans, credit cards and other lines of credit.

Also, because many medical bills are submitted first to insurance companies, consumers often don’t learn that they’re responsible for a medical bill until they hear from a collection agency.

“I think it’s a great change,” Plano mortgage banker Rodney Anderson said of FICO’s move. He has long sounded the alarm about how medical debt can wreck a credit record.

“They don’t say it’s completely going to remove it, but I think it’s a positive change,” Anderson said.

The Consumer Financial Protection Bureau also praised FICO’s change.

“A CFPB study recently found that some credit-scoring models may overly penalize consumers because of medical debt,” said a bureau spokeswoman. “Given the critical role that credit scores play in consumers’ lives, we welcome steps by the industry to adjust how it weighs medical debt.”

The new version of FICO will be available to the three national credit bureaus in the fall. They will evaluate it, and it will be released to lenders later this year.

Last year, VantageScore, a FICO competitor, began excluding medical debt when calculating a consumer’s score if the debt was reported by a hospital or doctor’s office. VantageScore also excludes all paid collections when calculating a consumer’s score.

Consumers need to realize that there are caveats to all this.

“FICO’s new scoring logic will help some consumers more than others,” said John Ulzheimer, president of Consumer Education at “Consumers who have pristine credit reports but for medical collections will also likely see their scores skyrocket when those collections are paid, settled and then eventually updated to show a zero balance, as they’ll be ignored.”

But those with bad credit won’t benefit.

“If they’ve already got poor credit, then [the scoring agencies’] ignoring a collection or two is going to be largely meaningless,” Ulzheimer said.

There’s one more thing that consumers need to remember:

“Just because the FICO and VantageScore credit scores ignore or discount the impact of medical and paid collections doesn’t mean that the collection won’t still pose a problem,” Ulzheimer said. “The collections will still be present on the consumer’s credit reports, so lenders can still consider them.”

Still, FICO’s move is a good one.

Unpaid medical debt isn’t like other debt because it’s often beyond your control. It’s not caused by poor money management and therefore doesn’t reflect a person’s creditworthiness.

After all, you didn’t ask to have a major illness or a serious accident.

Reference: Pamela Yip – Dallas News
Credits to: James Pagan, FICO Credit Score Advisor | Certified FICO Professional ½ F.C.R.A/FACTA Certified | 972-985-2494 ½ After 6pm 817-658-8387 

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