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Newest FICO Score Downplays Medical Collections

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Mark Cappel
UpdatedMay 22, 2024
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    3 min read

Medical collections dragging down your credit score? FICO scores will soon start ignoring medical collection accounts, resulting in as much as a 25-point score increase if your credit report has this kind of account. However, it is not clear how this will affect your ability to get approved for loans and credit.The headlines were, unfortunately, a bit optimistic. The FICO credit scores for people with medical collections will not rise anytime soon.

Changes are brewing in the FICO score, the most important credit scoring model used. Lenders and credit issuers use your FICO score to decide whether to offer you credit or a loan, as well as your interest rate and terms.

Lenders use the FICO credit score when deciding whether to offer someone a loan. For some lenders, a consumer's FICO credit score determines the interest rate offered. The higher your FICO score, the lower your interest rate and fees. The difference in a few points in a credit score can mean the difference between qualifying or not qualifying for a loan. A lower score can mean paying thousands of dollars more in costs over the life of a credit card account or automobile and home loans.

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Medical Debt Collections

The biggest changes in the new FICO score regard how medical collection accounts affect your score. More than 64 million US consumers have a medical collections on their credit report, according to Experian, on of the big-three credit bureaus.

Unpaid medical bills are not predictive of how consumers repay their other debts, according to the makers of the FICO score. One reason why an unpaid medical bill is given different weight than other unpaid bills is that consumers are often unaware of delinquent medical debt. Many assume their insurance paid or will pay the debt, according to the Consumer Finance Protection Bureau.

More than 50% of all debt-collection activity on consumer credit reports comes from medical bills, according to the Federal Reserve. So the change to the FICO credit scoring model is huge, right? Wrong.

Will the Changes in FICO Help You?

The new rules will apply only to the newest version of the FICO score, FICO 9. It may be many years before FICO 9 will improve the scores used by mortgage and other big lenders. Fannie Mae and Freddie Mac, the two largest buyers of home loans, specify that loan originators must use a version of FICO that was released more than 15 years ago. Industry sources indicate it is unlikely Freddie or Fannie will ask lenders to change to FICO 9 anytime soon.

It remains to be seen if credit card issuers will use FICO 9. It also isn't clear whether landlords or insurance companies will use it either. Until FICO 9 starts being used, the fact that your FICO score may rise, will have zero effect.

Bills Action Plan

FICO 9 is good news if you have medical collections appearing on your credit reports. However, the good news is limited. Lenders change the credit scoring models they use slowly. It may be years before the changes will be noticeable to mortgage shoppers. It remains to be seen how soon credit card companies, auto lenders, and insurance companies will use FICO 9.

In the meantime, you should:

  1. Check your credit reports periodically to avoid unexpected surprises.
  2. If inaccurate information appears on one of your credit reports, then take steps to remove the errors in your credit reports.
  3. If you have accurate negative issues with your credit reports, take the right steps to improve your credit score.

Debt statistics

Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Housing debt totaled $12.612 trillion and non-housing debt was $4.891 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in Ohio, 28% have any kind of debt in collections and the median debt in collections is $1369. Medical debt is common and 15% have that in collections. The median medical debt in collections is $607.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.