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FICO Changes Math; One CU VP of Lending Thinks it's a Good Idea
Tuesday, August 12, 2014 6:35 AM

Fair Isaac Corp. says it will give less weight to unpaid medical bills that are with a collection agency. The move 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.

Under the current system, collections can impact credit scores as much as foreclosures and bankruptcies do. But the infractions are often small. Borrowers can be on time paying their debts, for example, but thrown by a medical emergency.

Brad Clark, senior vice president of lending with Northeast Arkansas FCU, says they already do not hold medical collections against members.

“Medical collections aren’t necessarily a red flag for us. They are actually pretty common. If everything else on the member’s credit report looks good, we aren’t going to hold a medical collection against them,” Clark tells the Leaguer.

According to Clark, a new medical collection [under the current system] for as little of an amount as $25 can drop a person’s credit score by 100 points. And consumers, he says, often do not understand the impact medical collections have on their credit score.

“We have had some members who weren’t even aware that they had medical collections on their report, or that their scores had dropped as a result,” he adds. “When reviewing the credit report with a member, we do take that opportunity to counsel them on their credit scores.”

More than half of all debt-collection activity on consumers' credit reports comes from medical bills, according to the Federal Reserve. The number of U.S. consumers struggling with medical debt has been surging. As of 2012, 41 percent 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.

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.

Currently collections stay on credit reports for as long as seven years, even if a borrower has paid off that balance and remained up-to-date on other debts.

Clark says it’s important for consumers to understand what goes into their credit score, and how their debt management behavior can impact not only their ability to borrow, but also their ability to obtain insurance, rent an apartment, etc.

Fair Isaac will begin rolling out the new scoring model, named FICO 9, to credit bureaus this fall and to lenders later this year.