The announcement sees two significant changes FICO will make when taking into account medical bills that ended up going to collection:
1. Overdue medical payments that have been settled and paid in full will be ignored by the score.
2. Medical payments overdue and in collections will be scored less negatively than overdue credit card or other loan payments.
The change will mean FICO will no longer penalize consumers who have paid off medical bills which were sent to collection agencies, and lower the negative effect for those who still have unpaid overdue medical bills. The results of these changes will mean millions of consumers will see a rise in their credit scores, which will lower the rates they receive on loans they apply for, and will save them billions of dollars as a whole.
While this is great news for consumers, the effects of the change won’t be immediately seen. It will likely take a year or more for the new scoring system to be adopted by lenders. That means consumers who are applying for loans in the near-term won’t likely see a benefit, but those who are applying next summer and beyond should begin to benefit from the change.
The Fair Isaacs Corporation, which issues FICO scores, says that for a consumer who has kept up to date on all their bills except for unpaid medical bills, the new scoring system would raise their score by as much as 25 points.
These announced changes address a major contention consumer advocates have had with FICO when it comes to credit scores. These advocates have complained that medical debt is different than debt on credit cards and other loans, and treating them the same as credit card debt unfairly penalizes consumers who have medical debt. This is because consumers often don’t know the medical debt exists until it’s already gone to collection.
Due to the complexities of medical insurance, consumers can believe their insurance will pay for a bill, but when it doesn’t, they often don’t find out until the hospital has already sent it to a collection company. In many of these cases, the consumer pays off the bill as soon as they find out, but then still has a negative mark on their credit for years for late payment, which wasn’t something they intentionally failed to pay. In fact, the Consumer Financial Protection Bureau (CFPB) came to the conclusion that medical debts (both paid and unpaid) overly penalize consumer credit scores.
The new score system will be called the FICO Score 9, and lenders will begin to have access to it through the three major credit report agencies (TransUnion, Experian and Equifax) beginning later this year.