FICO scores help lenders assess the risk of lending to individual borrowers. However, according to a 2014 report from the U.S. Consumer Financial Protection Bureau, people who have mostly medical debt are penalized too severely compared to those with unpaid credit card bills and other kinds of debt. This could change as FICO will institute a new scoring system this fall that penalizes medical bills less than before.
Under the current system, people may pay off their overdue medical bills and still see a decrease in their FICO score. The new method plans to eliminate this by only lowering scores when bills go unpaid. However, even unpaid medical bills will not have the same negative impact on scores as they do now. The median FICO score for borrowers who primarily have debt from medical bills could increase by 25 points, according to a statement from the company. It is unknown how this will impact lenders but hopefully the new scores will paint a better picture of risk.
A large reason why medical debt is being singled out as less risky than the other kinds of debt is a significant difference in how medical debt is accumulated. Most people know when they are getting into debt with their credit cards or applying for loans, but often times people do not know they have overdue medical bills. Conflicting signals from medical personnel and health insurance companies could lead to money owed that people thought was covered by their plan.
Although this new system could come as a relief to people with medical debt, especially those who are able to pay it off, those who are deep in debt or have other types of obligations will not experience a big impact. Exploring debt relief options like bankruptcy could free people from creditor harassment and other issues.
Source: Reuters, “FICO’s new scoring model to help lenders better assess risk“, Amrutha Gayathri and Emily Stephenson, August 08, 2014
Source: Reuters, “FICO’s new scoring model to help lenders better assess risk“, Amrutha Gayathri and Emily Stephenson, August 08, 2014
