Credit score change discounts medical debt

People with unpaid medical bills, or debts that were paid off after going into collections, could find it easier to get a loan or a lower interest rate following a change in the way some credit scores are calculated.

FICO, a private company that develops the credit scores used in most lending decisions, said it concluded the changes would result in more accurate decisions about loan risks. For many consumers, the changes should mean higher credit scores.

"These enhancements help lenders because they result in greater precision. At the same time, the median FICO Score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points," a FICO statement said.

"That's great news," said Dorothea Bernique, director of the nonprofit Increasing Hope Financial Training Center in North Charleston. "That 25 points can make the difference between qualifying or not."

The changes could be particularly important in South Carolina, where an estimated 46.2 percent of people with credit scores had non-mortgage debt in collections last year.

Only Nevada had a higher percentage of people with debt in collections in 2013, a study by the Urban Institute found.

More than half of consumer debt that goes unpaid and is sent to collection agencies is medical debt, according to FICO. However, the company found that unpaid medical bills do not predict potential loan defaults the way other unpaid debts might.

"Consumers that have an otherwise good credit history, other than a medical collection, are not at risk of default," said Anthony Sprauve, spokesman for FICO.

Debbie Kidd said she regularly sees clients during credit counseling and homebuyer education classes at nonprofit Charleston Family Services who were unaware they had uncollected medical bills on their credit reports.

Credit reports contain the data used to calculate a credit score with FICO's software.

"With medical collections, the unfortunate thing is, most people who don't check their credit reports regularly don't even know they have them," Kidd said.

Others can end up with unpaid medical bills because they are uninsured, and the bills for a major medical event could amount to hundreds of thousands of dollars.

Under the current FICO score system, a medical debt sent to collections would damage a credit score considerably, and even if that debt were paid in full, it would continue to inflict damage.

In the coming FICO 9 score system, medical debts in collection will have a smaller impact and debt collections that were paid off won't count at all.

Think of the FICO 9 scoring sytems as a computer software upgrade, which is essentially what it is. Most lenders currently use FICO 8, but many use an older version.

"The (federal) Consumer Financial Protection Bureau had recommended in May that medical debt be looked at separately," said Carri Grube Lybarker, administrator of the S.C. Department of Consumer Affairs. "It's just kind of a different animal, partially because of third-party (insurance company) involvement."

She said the potential increase in some credit scores is a big deal.

"This really could go beyond someone being able to get a credit card, or get a lower interest rate," she said. "It could mean someone will be able to rent an apartment."

A FICO score ranges from 300 to 850, but more than 75 percent of consumers have a score of 600 or more, so most lending decisions happen in a fairly narrow score range.

There are actually many different types of FICO scores, and there are other credit scoring systems. One question going forward is how quickly and widely the new FICO 9 scoring system will be adopted by lenders, and how much lenders will rely upon the scores.

"Each lender has its own way of evaluating creditworthiness, thus the impact of this change will vary by lender," said Gail Cunningham, speaking for the National Foundation for Credit Counseling. "Although the credit score number may appear stronger, the facts of a person's credit history won't change."

"It will be interesting to see if 750 becomes the new 650, with lenders adjusting their credit granting standards," she said.

Reach David Slade at 937-5552.