Your Credit Score May Improve
A couple of weeks ago, we read about how one-third of Americans have had debt in collections negatively affecting their credit score. Well, there’s some good news. FICO, formerly known as Fair Issac Corp., just announced changes on how they calculate consumers’ credit scores.
On Thursday, FICO announced its new credit scoring model, FICO Score 9. The new model will bypass collection agency accounts that have been paid and it will make a clear distinction on the impact of medical and non-medical collection agency accounts.
Medical bills vs. Non-medical bills
Prior to this change, which is expected to take place in the fall, there was no distinction between medical and non-medical bills. This ruined the credit scores of millions of Americans who were unfortunate enough to need expensive medical care.
Medical bills will still have an impact on your credit score but not as high an impact as when you are in debt because you wanted a Ferrari.
The Consumer Financial Protection Bureau (CFPB) released a study which states that medical debt unfairly hurts credit scores. CFPD Director Richard Cordray said, “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.”
And he is right. We shouldn’t penalize unpaid medical bills the same way we penalize unpaid credit card bills, or unpaid cellphone bills.
According to the released statement by FICO, the new change in FICO Score 9 is expected to raise the median score of consumers whose only delinquent account is an unpaid medical bill by 25 points.
This is major news for millions of Americans. According to the National Center for Health Statistics at the U.S. Centers for Disease Control and Prevention, one in four U.S. families struggle to pay medical bills. “Unpaid medical bills is the number one reason why families declare personal bankruptcy. It causes people to lose equity in their homes, to endanger their retirement and their kid’s college education. It will destroy a family financially,” said Karen Pollitz, a fellow at the Kaiser Family Foundation.
Also, many people who have unpaid medical bills are often unaware that they owe this money. They often assume that the costs were covered by their insurance, but this is a whole other issue.
Paid Collection Agency Accounts
The other major change in the way FICO Score 9 will calculate credit scores is the bypassing of paid collection agency accounts.
Accounts in collections have a high negative impact on our credit score, whether they are paid or not, and they stay on our credit report for seven years. With the new system, consumers will be somewhat rewarded for paying off their delinquent accounts.
It is not clear from the press release if the paid collections will stay on your report or not – it probably will – but the new change will give a positive boost to your credit score if you had a debt in collections that was paid off.
Consumers with Limited Credit History
FICO Score 9 will also address the concern of lenders to better assess consumers with limited credit history or the so called thin-files. Instead of determining credit risk based on paid or unpaid bills, it will be quantified in the various degrees of a consumer’s payments history.
FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently,” said Jim Wehmann, executive vice president for Scores at FICO. “By applying innovative predictive modeling techniques on recent data to capture consumer credit behavior, FICO Score 9 will extend FICO’s leadership in providing the credit score that most accurately and fairly defines U.S. consumer credit risk.
The changes about collection accounts are similar to the VantageScore 3.0, which is currently being used but not as popular as the FICO score. FICO is currently being used by about 90% of lenders, but there’s an increase in popularity of the VantageScore, which might be the reason for the recent change.
We still don’t know how much the scores will increase, but a few points could either save you or cost you hundreds if not thousands of dollars in the lifetime of a loan. The table below is an approximation of interest rates given based on credit scores.
| FICO Score | APR |
|---|---|
| 760-850 | 3.789% |
| 700-759 | 4.011% |
| 680-699 | 4.188% |
| 660-679 | 4.402% |
| 640-659 | 4.832% |
| 620-639 | 5.378% |
Table Source: MyFICO.com
What do you think of the FICO Score 9 changes? Do you expect your credit score to increase?
“Also, many people who have unpaid medical bills are often unaware that they owe this money. They often assume that the costs were covered by their insurance, but this is a whole other issue.” Yikes! That makes me nervous… It’s great news that medical bills will be having less of an impact on credit scores- thanks for sharing! I hadn’t read about this yet.
It’s nice that the overall effect of the change will be to increase credit scores, but is it just me, or shouldn’t we just pay off all of our debt, including medical debt? I understand that you may incur more medical expenses than anticipated, but if you have insurance then the expenses you incur won’t be that much – and everyone knows that medical debt is easy to go on a payment plan (in which case it shouldn’t get reported to the credit agencies). And for people who don’t know what debt they have, it sounds like it’s time to take financial inventory!
Medical debt is still going to be considered on your credit report, but is going to be treated a bit different than other debt. Similar to the way they treat mortgage debt when calculating your debt to credit ratio. If they calculated your mortgage the same way they do credit cards then people who have houses would have a terrible credit score.
Natalie,
I totally agree with what you are saying – put the medical debt on a payment plan and slowly pay it off if that’s the best you can do. But you’d be surprised about how many people don’t know that a payment plan is an option. Or sometimes people feel overwhelmed by the amount of medical debt and put off making phone calls to hospitals/insurance companies, especially if their illness is making them feel hopeless.
Thanks for sharing this, Aldo. I hadn’t heard this information yet! I don’t have any unpaid medical bills (to my knowledge), so I don’t know that this change will affect me. Either way, it’s good to be aware of the change.
Hey Aldo,
I think I recently read about these changes as well and I do believe it is a good thing that medical debt won’t be weighed for heavily. I am kind of torn as to if we should be on a single payer to be honest. I don’t know any other developed countries where an unexpected medical procedure / emergency can lead to bankruptcy… that said the only way costs can be tamed is by changing people’s habits and it seems that most people are pretty stubborn.