Many Americans know that a good credit score (usually 715 and above) can open the door to many opportunities including financing a house, a larger portion revolving credit and lower interest rates. But Americans also know that unpaid large medical debts can hinder your credit score. Well, until now.
Pretty soon, those that have a mountain of outstanding medical bills will find themselves with a higher credit score. This is all due to a new scoring model that is set to debut this fall. Introduced by FICO, the top credit score provider in the US, it will put less emphasis on medical debt in collections, thus reducing its effect on consumers’ credit scores. In the new calculation method, the median FICO score for people who only have outstanding medical bills on their report will go up by about 25 points.
John Ulzheimer, an expert at CreditSesame.com said, “This underscores that medical obligations are very different than any other kind of obligations because consumers don’t choose to incur hospital debt – it’s a very different type of risk posed by a consumer when they default on that type of debt”.
The new credit score calculation means that consumers who have large outstanding medical bills that they can’t pay will appear to be less risky to lenders. This, in turn, will allow them to qualify for better rates and deals.
But the deal will only be sweetest for consumers that only have unpaid medical bills. Those that have other debts in addition to their medical ones will find themselves with only a slight improvement in their credit scores, if at all. And, therein lays the sweetness of the deal – no one will get hurt with the introduction of the new calculation method.
As Ulzheimer points out, “It’s going to be either neutral or helpful to everyone.”
A second change that will be implemented in the way FICO calculates scores is that they will no longer factor-in debts that have been paid off or settled. This is in contrast to the way it is currently done where debts in collection, paid off or otherwise, have an impact on consumers’ credit scores for up to seven years.