FICO 9 Credit Score ProtectionsHalf of all negative credit reporting activity is from medical bills.
- FICO to stop including credit-score calculations for any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency.
- The credit-rating standards company also will give less credit rating weight to unpaid medical bills that are with a collection agency.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB), in a May 2014 report, criticized credit-scoring models used by the financial industry, saying they put too much emphasis on unpaid medical debt and lead to an overly negative view of consumers. CFPB officials say that medical debt is inherently different from other forms of debt because consumers are often unaware of what they owe to hospitals and doctors.
The impact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers’ credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points.
How Important is Your Credit Rating
Even a small move in a borrowers’ credit score can change the outcome of a loan application. Most lenders have a minimum credit-score requirement to lend to an applicant, and lenders can deny someone whose score is even one point below the minimum.
Lenders determine the interest rate a borrower will get based on the borrower’s credit-score bracket.
For example, borrowers with a FICO score between 760 and 850 get an average interest rate of 3.823% on a fixed-rate, 30-year mortgage of $300,000, according to Informa Research Services, a market-research company in Calabasas, Calif.
Borrowers with a 759 FICO score get a 4.045% interest rate on the same loan. Over the life of the loan, the 760 borrower would pay $204,650 in interest charges—or $13,764 less than the 759 borrower.
Such activity results in lower credit scores for consumers, meaning that lenders are more likely to be cautious in extending credit. The number of U.S. consumers struggling with medical debt has been surging. As of 2012, 41% of U.S. adults, or 75 million people, had trouble paying medical bills, up from 58 million in 2005, according to a report released last year by the Commonwealth Fund.
American consumers now no longer have to worry about debt negotiation and debt settlement degrading their FICO Credit Rating. Fair Isaac (FICO) will now stop including any record of a consumer failing to pay in credit-score calculations if the bill has been paid or settled with a collection agency.
Many Americans seeking debt relief will now benefit from this major change in how the most widely used credit score in the U.S. is tallied; making it easier for tens of millions of Americans to get loans. FICO Credit Rating has already has already begun rolling out the new scoring model to be officially enacted in November 2014, named FICO 9, and to credit bureaus fall and to lenders later this year. You mayNew FICO Score to Improve Credit Score of Millions of Americans
FICO 9 Credit Score Medical Debt and Credit CardsCFPB Report Medical Debt and Credit Scores The number of U.S. consumers struggling with medical debt has been surging.
Lending Without Creating More Credit Risk
The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk. Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report. The changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores. ”
As of July, about 64.3 million consumers in the U.S. had a medical collection on their credit report, according to data from credit bureau Experian. And of the 106.5 million consumers with a collection on their report, 9.4 million had no balance - and won’t be penalized under the new credit-score system.
Under the old system, collections can impact credit scores as much as foreclosures and bankruptcies do. Yet the infractions are often small. Borrowers can be on time paying their debts, for example, but thrown by a medical emergency.
Collections stay on credit reports for as long as (7) seven years, even if a borrower has paid off that balance and remained up-to-date on other debts. Fair Isaac said it ran studies to determine how likely borrowers are to repay their debts if they had a stellar credit record with the exception of such collections.
Consumers often are unaware that their insurance company isn’t paying a medical bill and can end up in default and in collection without knowing it. In contrast, lenders often send repeated notifications to consumers to let them know they have fallen behind.
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