Got Medical Debt? Here’s Good News About Its Effects On Your Credit Score

FICO 9According to the Wall Street Journal, 64 Million Americans have medical debt on their collection report.

That’s an astonishing number and certainly raises awareness and some concern for this financial issue.

People are fighting to get out of medical debt, or buried so deep they don’t know what to do. Is that you?

Financial gurus advise people to save for emergency situations, such as with the unplanned medical expense. That’s certainly sound advice and the right place to start, but sometimes the basics of an emergency savings account aren’t enough to support a major illness or medical need.

It’s hard to fathom the cost of major medical treatments and what it must do to the most financially prepared people. Medical debt is a real concern and it can occur overnight to any of us. Not to cause alarm or create anxiety by that statement, but it’s important to highlight the issue. And more than that, there is a glimmer of hope for the credit scores that have been adversely impacted by those experiencing such debt.

Medical Debt and the FICO Version 9 Changes

FICO, the Fair Isaac Corporation, that provides the credit scoring software that generates your FICO, or credit score, is rolling out significant changes with Version 9 of their software. If you’re not aware, your FICO (not to be confused with your annual free credit report) is the score that is available at the three major credit reporting bureaus (Experian, TransUnion and Equifax) and is considered the most broadly used score, in addition to your report, by lenders when evaluating likelihood of you meeting your credit obligations.

The good news is that FICO Version 9 will reduce the effect of overdue medical bills and will stop penalizing consumers who have successfully paid off debts and now have zero balances or settled those debts. Version 9 will not weigh medical debts as heavily and according to a NY Times article, such debts account for about half of all unpaid collections on consumers’ credit reports.

The news gets better. Because of the changes, those with an otherwise clean report, except for medical debt, could see their credit score (FICO) increase by 25 points! This increase is worth mentioning because we know the FICO score determines how likely consumers are to repay their loans and according to FICO, is used to make “billions” of credit decisions each year.  These improved credit scores will be especially helpful for those who captive to medical debt they didn’t ask for to begin with.

Get more articles about credit reports and scores here.

But keep in mind that a better FICO score can mean a lot of things for people and not just a free ticket for consumers to go out and get a car loan or apply for more credit!  That’s far from the benefit we’d like to promote here. Many employers make the credit score part of their employment decision process and insurance companies also consider the FICO in determining insurance premiums. More than these benefits, the score improvement could help people to become home owners should that be their goal, or save significantly on mortgages by refinancing at lower rates.

When will we see the FICO Version 9 changes take place? According to FICO, the changes are set to start rolling out this fall. That said, financial experts say that it’s going to take up to a year or even 18 months for lenders to make the appropriate changes and start adopting this new version of the software. Before you frown at the timing, keep in mind the benefits and the fact that FICO’s software is looks to be becoming more accurate.  Not one size fits all when it comes to you reporting your credit score and the software company appears to be adjusting accordingly.

FICO Version 9 Final Thoughts

Like it or not, the credit score, or FICO, is going to be around indefinitely. Some suggest that the score doesn’t matter if you have enough cash to buy a house or car. That’s fair, but the score is ingrained into our financial ecosystem and more than just part of the loan evaluation process. That’s why it’s important to pay attention to your score and take it seriously.

With the FICO Version 9 changes, one could see the scoring is gaining ground in its ability to measure how responsible someone truly is with managing their wallet and not taking on too much debt that wreaks havoc on their financial profile and well being.

Again, the changes that will improve credit scores should not be viewed as an opportunity to acquire more credit or what could result in more debt. Rather, consumers should wait for these changes to roll out and watch the impacts as they monitor their credit scores. And certainly, these changes don’t mean consumers aren’t responsible for paying back their medical debt at the end of the day. An improved score may be the trigger for better insurance rates and to reduce the cost of home ownership over the long haul.

Not sure what your score is? Get a free credit score by clicking here.

Photo by LendingMemo

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