Credit-scoring giant FICO announced in August that it would soon roll out a nuanced way to report medical debt in collections. The new model, called FICO 9, decreases the impact of medical bills in comparison with other types of debt. FICO’s announcement comes on the heels of a number of studies and reports highlighting the disproportionate effect of medical debt on American families.
While there are some big caveats, on the whole, FICO 9 will be a good thing for those with paid medical collections. Yes, it will take some time, but many people will see their scores improve. In light of the new changes, here’s what you need to know if you’re among the 1 in 3 Americans whose credit is affected by medical debt.
1. The score isn’t the entire story.
The main reason FICO changed its scoring standards is because many credit checks were being unfairly impacted by medical debt in collections. Under the old model, FICO 8, debt was debt — getting injured in an accident with no means to pay hospital bills could be viewed much the same as recklessly running up a credit card balance. If lenders pull your credit score, you might wrongly look like a credit risk. Under FICO 9, if they pull your credit report with its greater detail, they could see the distinction.
“It’s important to know the difference between your credit report and your credit score,” says Dana Twight, certified financial planner and founder of Twight Financial Education in Seattle. “I like to remind clients that the score is derived from the report, which is why you need to look at the report at least once a year.” And you should look not just to check on collections. Twight points out that it’s the responsibility of the consumer to ensure his or her credit report is accurate. This includes confirming that name spelling, employment history and addresses are correct, as well as spotting any fraudulent activity.
Everyone is entitled by law to a free credit report from each of the three major agencies once per year. Twight recommends using www.annualcreditreport.com, the only federally authorized site for free credit reports, which, unlike commercial imposters, won’t require payment information for just a report. Your credit score is not included, but it can be purchased separately.
[Read: 3 Financial Reasons You Should Keep Copies of Your Medical Records .]
2. FICO 9 will improve credit scores for people with paid or unpaid medical debts.
“There are many things to like about FICO 9 when it comes to medical debt,” says Cathy Curtis, a National Association of Personal Financial Advisors-registered independent financial planner in Oakland, California. For one, medical debt that was in collections but eventually paid off will no longer be counted. And outstanding medical debt will count for less under the FICO 9 scoring model — “possibly resulting in up to 25-point increases in credit scores for consumers who have otherwise clean records,” Curtis notes. “This 25-point increase translates into better rates on loans, saving consumers thousands of dollars over a lifetime.”
And that’s great news for a lot of people, so long as their FICO 9 score is the one in question when they’re looking to get auto loans or credit cards.
[Read: 3 Myths and 3 Truths About FICO 9 .]
3. FICO 9 isn’t the only credit-scoring model out there.
Although FICO is the most widely used score out there, there are other models. What’s more, three previous versions of FICO are still being used as well.
“Nowhere are credit scores more important than when applying for a home mortgage,” Curtis says, noting that it’s “almost always the biggest purchase anyone will make in their life.” And so it’s important to know that the FICO changes won’t mean much when it comes to purchasing a new home. Not for a while, anyway.
“In many cases, the guidelines are set by two secondary mortgage-makers: Fannie Mae and Freddie Mac,” Curtis explains. “Fannie and Freddie are known to be behind on adopting FICO’s new models, and hope is low that guidelines will be changed anytime soon.” In fact, many mortgage lenders still use the FICO 7 model, the latest approved by Fannie and Freddie, some 10 years ago.
[See: Infographic: How to Read Your Hospital Bill .]
4. You can get erroneous reporting removed.
“Millions of Americans are victims of our convoluted medical billing system and end up with medical collection debt,” Curtis says, but all too often those medical collections accounts are mistakes. This is true for other types of collections, too, but medical bills seem particularly susceptible to erroneous reporting. Your insurance-claims processor may make an error in coverage or deny a claim due to incorrect coding. Or, if you made an arrangement to pay without involving collections agencies and a note was not made in your file, the bill may go to collections without you knowing.
If you spot an error on your credit report, it takes time and effort to get it fixed, but correcting the mistake will be worth it. You’ll need to notify one or more of the credit bureaus — Equifax, Experian and TransUnion — in writing; at that point, it’s their responsibility to investigate and report back to you. If you’re lucky, the investigation will come up in your favor and they will remove the erroneous account. If not, you’ll have to take it up with whoever made the unwarranted report. For more details, consult the Federal Trade Commission’s guide.
[Read: Can You Afford Your Cancer Care? ]
5. The best protection for your credit score, still, is avoiding collections.
It goes for all types of debt, but the best way to keep your credit score healthy is to avoid collections at all costs. This means that when you get a medical bill, you should open it right away — never procrastinate. If you can’t pay it all at once, there are ways to get help.
Some people might now assume that medical debt doesn’t really matter, but that’s far from true, Twight says. “If it goes to collection, it matters a lot. I have a client right now who was turned down for a private student loan, in part due to old unpaid medical collections.”
The sooner you open your bill and face the music, the more time you’ll have to make arrangements to pay it off. Medical billing staff will notice the effort, and may be more willing to work with you right away than if you delay in responding to phone calls and notices to pay. As with your health, prevention really is the best medicine.
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5 Things You Need to Know About Medical Bills on Your Credit Report originally appeared on usnews.com
