Medical Debt Still Stinks, But New Credit Score Change Will Make It Hurt Your Life Less


Credit reporting behemoth FICO is making changes in the way it calculates credit scores. And for once, there’s some good news. The changes are expected to make it easier for most Americans to access credit — that is, to borrow money and take out loans — and will punish fewer consumers for incurring some debts that were out of their control.

As the Wall Street Journal reports, FICO is making two key changes in the way they calculate their numbers, and and those changes will make millions of consumers’ scores go up.

The first is that overdue or delinquent bills that have gone to collections will no longer count as unpaid bills once they have been settled. Currently, if you have a 60 day overdue bill that goes to collections, and you pay the collections department when they call you, that still gets calculated in your credit score as unpaid. Now, the score will treat paid bills as paid bills.

The second change is in relation to medical debt: although medical debts will still be considered in a credit score, they will be given less weight in the calculation.

Unlike a car or house purchase that a consumer has some control over, outlandishly large medical bills can basically drop on to anyone out of the blue after an illness, injury, or accident. No consumer really controls whether they end up with a rare cancer, or if they get hit by a driver who flees the scene while they’re biking to work. As a CFPB study released earlier this year found that although outstanding medical debts lowered consumers’ credit scores, those individuals were just as likely to pay back the rest of their bills on time as borrowers without medical debt were.

The changes will have an impact on tens of millions of Americans. According to the Wall Street Journal, over 64 million Americans have medical collections on their credit reports and over half of all debt-collection activity on consumers’ credit reports comes from medical bills. And of the roughly one-third of the country that has had a bill go to collections, well over 9 million have paid off those bills and will no longer get dinged for them on their credit reports.

Once those two changes start appearing in score calculations, FICO estimates that consumers whose only negative ding on their credit reports is a medical debt will see their scores go up by about 25 points.

25 points may not sound huge on a score spectrum that goes up to 800, but for many individuals it can be the difference between getting a loan and being turned down, or between being shunted into disadvantageous subprime loans and actually receiving reasonable loan terms. Higher credit scores also translate to lower interest rates. On larger loans, like mortgages, even an 0.25% difference in the interest rate offered can mean tens of thousands of extra dollars over the life of the loan.

FICO will be launching their new scoring system, called Score 9, this fall. But it’s not instantaneous — instead, it’s more like a Windows upgrade. And two years after Windows 8 came out, every one of us knows someone somewhere who’s still stuck on XP.

Credit card and auto lenders are likely to upgrade first, says the WSJ, but mortgage lenders often lag a version or two behind. So even though FICO has about 90% of the credit-score market tied up, consumers are still likely to see discrepancies.

FICO Recalibrates Its Credit Scores [Wall Street Journal]
FICO Score 9 Introduces Refined Analysis of Medical Collections [FICO press release]