Medical Debt Takes Back Seat in New FICO Credit Score


Come Fall 2014, you could notice a boost to your credit score. FICO recently released news of an update to their credit score model which would soften the blow of medical debt on consumers’ scores. Collection & Credit Risk reports that the change comes at a time “when medical debt accounts for nearly half of all unpaid collections on consumers’ credit reports.” Facing both high (and often unexpected) medical debt alongside a lowered credit score has been an ongoing financial struggle for millions.

What’s changed

Those with medical debt in collections (but otherwise healthy financial standing) are expected to see scores jump an average of 25 points. This increase could be enough to bump their score up to a new lending threshold, a relief to anyone with low credit and still looming medical bills.

Also set to change? The new model will no longer factor in accounts that were once placed in collections but have since been paid off. CNN Money reports “FICO will begin ignoring debt in collections that has been completely paid off or settled. Currently, debts that go into collections, even if they are paid off, are factored into all credit scores for up to seven years.” With more than 30% of consumers with at least one account in collections, this could prevent resolved financial history from marking their score once it’s fully paid off.

These changes potentially benefit those who have incurred high medical debt while continuing to demonstrate responsible borrowing habits. Those with medical debt on top of unpaid credit card debt may not notice a change in their score. The new model is focused on lessening the impact of medical debt on a credit score but will continues to factor in other unpaid debt.

Why the update matters

Credit score models have often been criticized for their harsh terms and unforgiving standards. In the past, when a person was hit with high unexpected medical debt they could also very well expect to experience the financial stress of a tanked credit score. This meant they could be considered a higher risk for lenders – regardless of otherwise excellent financial standings.

Lowered scores have a ripple effect, with mortgages and interest rates often skyrocketing as a result. In some instances, low scores block a potential borrower from qualifying for a loan at all. For those looking to take out a mortgage, being denied a lower interest rate could mean potentially thousands of dollars more in interest over the life of the loan.

On a larger scale, defining the severity by which different kinds of unpaid debt are measured is a step in the right direction for the lending industry. For consumers, this easing of financial pressure is a welcome sigh of relief.

Higher scores may give the green light to borrowers – but beware

One thing to remember if you are one of those expecting to see a bump in your credit: a higher score may give you more flexibility in your financial plans but don’t take new financial responsibilities lightly. Higher scores may result in lowered interest rates but these deals only benefit consumers if they’re financially able to manage new debt.

If you’ve recently experienced a boost in your credit score, don’t automatically be swayed by lower interest rate credit card offers or other lending “perks.” Take a poll of your financial health before taking on any new debt and make sure that you feel comfortable with the terms of any financial agreement. Creditworthiness is based on more than credit score. Responsible borrowing habits and a solid financial foundation take precedence over a high credit score.

Final thought

A high credit score is meant to represent a responsible borrower but don’t make the mistake of confusing high scores alone with financial success. Though your credit score can be used as a marker for financial progress, establishing good financial habits is paramount. That means not borrowing beyond your means, balancing your expenses, and understanding the terms of any debt.

If you’re looking for more information on credit scores or getting out of debt, check out our Resource Centers for more tips.

Image Credit: The National Guard

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