Deep in Medical Debt? Surprising Reason Your Credit Score May Be Going Up Soon

Medical bankruptcy

One of the main concerns when you can't pay your bills is the impact it will have on your credit score. Your credit score determines how much you pay in credit card interest, for auto and homeowner's insurance, whether you can get a cell phone contract and if you can get a job you want. Medical bills are one of the leading causes of bankruptcy, but a new version of the calculation that will be implemented by FICO this fall will change things for those with lingering medical debt.

Who or What Is FICO?
FICO is the firm that created the credit score calculation used by Equifax, Experian and TransUnion. On August 7th, the company announced changes in their calculations concerning both paid accounts in collections as well as past-due medical bills. Currently, medical bills account for roughly half of unpaid collections on credit reports and is also a major driver in bankruptcy filings. The FICO modification won't make those bills go away, but will make it easier on consumers dealing with them.

How Much Will This Change Up Your Score?
For those that have no other credit problems except for medical bills, this could cause an increase of 25 points based on the new calculation. This is enough of an increase to get better interest rates on credit cards, loans and other financing which can ultimately save consumers thousands of dollars. This likely won't be enough to turn a “no” to a “yes” but can change the rates you're offered. Still, it's fair that medical bills not carry as much weight because studies have shown they're not an apt predictor of whether you'll pay.

New Change for Paid Collections Account
This update to the credit score calculation also includes a modification for debts in collection that have been paid. Historically, both paid and unpaid collection accounts were weighed equally but, now, paid collection accounts will be ignored. So if you settle a debt with a collection agency such that it shows paid, it will not count as a negative toward your score. This is fair because you've settled the debt and shouldn't have it continue to drag you down for years to come.

When Will This Change Take Effect?
FICO will start using the new calculation this Fall, but you should know that not every FICO customer may choose to use this revision. This is part of FICO Score 9, the latest update, but not every customer will choose to use the latest update. When FICO released their version 8 back in 2008, roughly half of their customers adopted the latest version. So the upshot is that while FICO is changing their tune on past-due medical bills and paid collection accounts, you may not reap the benefits immediately depending on which calculation model creditors choose to use. But, overall, this is still promising news.
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