Medical debt now less of a hit on credit score

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News | by — August 9, 2014

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Fair Issac Corp., otherwise known as FICO, just announced some major changes to how certain types of debt will be reported on a consumer’s credit report.

Medical debt will now be given less weight on a consumer’s credit score than it did in the past. FICO indicated that for individuals for whom the only negative credit report entries are medical debt, should expect to see their credit score increase by 25 points. The Consumer Financial Protection Bureau noted that medical debt is unpredictable, often carries very high balances, and can be more subject to dispute (such as in the case of an insurance denial) than other types of debt. Medical debt collection amounts to approximately 50% of all debt in collections. These reasons prompted the change in treatment of medical debt in the FICO score matrix.

In addition to the change in how medical debt is treated, FICO also announced it will no longer treat debt that went to collections but was repaid as a negative mark on a consumer’s credit report. Why does this matter? FICO scores are used to evaluate a consumer’s credit worthiness in 90% of consumer lending determinations. A good score earns a consumer more favorable terms, such as lower interest rates on consumer loans. The new FICO system becomes available to lenders this fall, though use of the new scoring system will not be mandatory.

Many clients we meet with to discuss debt settlement options or bankruptcy are unaware of what is on their credit report, and don’t know their FICO score. Being aware of where you stand is critical to analyzing your best course of action. If you are struggling with debt, or have been turned down for consumer financing, we encourage you to investigate why. Websites such as Annual Credit Report will allow you to pull one free credit report a year. Don’t know your FICO score? Learn about different low cost and free options to access it here.

Interest in speaking with Tim or Michelle about your situation? Contact us for a free consultation.

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