If medical debt has hurt your credit score, there’s good news.

Photo: Jane M. Sawyer for Morguefile. 


Q: I’ve heard that there have been changes to the way medical debt is calculated in your credit score? Is this true?

A: It’s true, and it’s good news for so many families who have been buried under medical debts that are not covered by insurance.

Unpaid medical bills are famous for wreaking havoc on consumers’ credit scores, said James Sonneborn, a certified financial planner with RegentAtlantic Capital in Morristown.

“According to the Federal Reserve, nearly 20 percent of credit reports contain a medical-related debt collection,” he said. “In turn, approximately 40 percent Americans saw their credit scores reduced by as much as 25 points due to outstanding medical bills.”

So on Aug. 7, 2014, FICO, the creator of one of the most widely used credit assessment metrics in the United States, announced it was reducing the emphasis its calculation methodology placed on unpaid medical bills.

“While FICO has revised its scoring methodology, it may take some time for major lenders to update the databases they use when assessing prospective borrowers’ credit histories,” Sonneborn said.

This new change can benefit consumers who have otherwise paid their bills on time but have run into a problem with a doctor or hospital bill, said Michael Schreiber, editor-in-chief of Credit.com.

He said the change is moving beyond FICO.

“All paid collection accounts, including paid medical collection accounts are excluded from the newest version of the VantageScore credit scoring model,” he said. “They say they are able to score 30 to 35 million more Americans because of this change.”

Schreiber said while all this sounds great, there are a few things to consider before you get too excited.

“Different lenders use different scoring models for different reasons,” he said. “A financial institution may use one type of credit score for credit card lending, another type for auto loans, and still another for mortgages.”

Next, and perhaps most importantly, Schreiber said, the only way that any new credit scoring model will benefit a consumer is if the financial institutions are actually using it.

“There are dozens of FICO scoring models alone, and the reality is that it takes financial institutions quite some time to incorporate new models into their lending processes. Sometimes it can take years,” he said.

So, be patient.

If you already have existing medical bill blemishes on your credit report, Sonneborn says you can fix it by paying the bill.

“Payment could take the obvious form – pay the outstanding balance — or it could come in a somewhat more palatable fashion — a negotiated settlement,” he said. “After you’ve paid the bill, all you can do is wait. Unfortunately, those blemishes stay on your report for up to seven years.”

Email your questions to moc.p1582296588leHye1582296588noMJN1582296588@ksA1582296588.

This story was first posted in November 2014.
 
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