There is a buzz in the air about the changes being made to the FICO scoring model. What is this all about?
Fair Issac Corporation, or FICO, is the creator of the FICO Score 9, which is the number that three major credit bureaus use to determine your credit worthiness. This score is often used by lenders whom you might seek out for a mortgage, car loan, credit card, personal loan, or any similar kind of lending. The score influences whether you qualify to get the loan, or whether the interest rate is higher or lower.
There were some flaws in the FICO scoring model. The problem was that many people had medical debt that was listed on their credit report as a “negative”. Even when that medical debt was settled, the negative entry lingered for years on their report. Often, this was the only negative entry on the report.
So you say to me: “Why should medical debt be treated any differently than any other debt? What makes it different from, say, credit card debt?” It turns out that tens of millions of people have medical debt collections on their reports. What makes it unfair is this: often, people don’t even find out about their medical debt until it makes it to a collection agency.
My guess is that many, if not most of you, have had the same experience as I have: you have some medical issues, and you get bombarded with paper from the insurance company that “explains” what is covered and what isn’t. Often, the papers say “This is Not a Bill!” so there is nothing to pay, even if it shows that there is a balance that has not been paid. Then you wait for the bill that never comes.
Next thing you know, some collection agency is contacting you, saying if you don’t pay the bill immediately, they will report it! And often it is a large amount that you are not prepared to pay in one lump sum. So what happens? It often goes on your credit report, and stays there long after the bill is paid.
FICO’s research has shown that if the only negative item on a person’s credit report is a medical debt, this does not present a greater credit risk than if there are no negative items. My guess is that they have examined situations like I have detailed above to come to their conclusion. That is good news to people who have these types of bills to settle, and even good news
But what does that mean to the idea of settling your debt in general? Here is my take. If you have lots of payment issues, it most likely isn’t going to matter much. But if the only issue is one or two paid accounts that are holding your credit score back, and if they are paid or you have the ability to pay them quickly, then go for it.
Most importantly, you should look toward a professional who can help you determine your options. We would be glad to sit down with you at no cost to do just that.