Medical bill nightmares unfairly sink credit scores, says consumer agency
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STORY UPDATED with Fair Isaac announcement that it will change scoring formula.
Surprise medical bills hurt consumers' credit scores more than they should, the Consumers Financial Protection Bureau said today. Not only is it unfair, it's bad business. Unpaid of late paid medical bills aren't a great predictor of a consumer's creditworthiness, the CFPB said after a study involving 5 million consumers. In other words, many folks end up with unpaid medical bills on their credit reports who otherwise pay all their bills just fine. Here's what Richard Cordray said about medical bills and the way they impact credit scores today:
According to a study by the Federal Reserve Board, over half of all collections on credit reports are associated with medical bills. Third-party collection agencies, collecting unpaid bills for hospitals, doctors’ offices, testing labs, and other medical service providers, typically furnish this information.
But in many ways, medical bills are unusual. When you take out a loan, typically you know how much you will owe and the interest rate you will be charged up front. But with medical costs, you have less visibility. Costs are often unknown until after treatment. Choice is a grey area for consumers when they get sick or need a medical procedure quickly.
When people fall ill and end up at the hospital with unexpected bills, they may not have the money to pay for the doctors, procedures, and medicine. Sometimes insurance does not cover everything. Sometimes they do not know what they owe because of how complicated the billing process can be. Other times they may not even know they owe anything, thinking that their insurance will cover the bill. Sometimes the debt is caused by billing issues with medical providers or insurers. Complaints to the Bureau indicate that many consumers do not even know they have a medical debt in collections until they get a call from a debt collector or they discover the debt on their credit report.
The report says consumers' score are artificially 10-22 points too low because of medical bill issues.
Talk about a Red Tape nightmare. You get sick, you get a bill you never see, you get dinged on your credit score, and you end up with a subprime car or home loan because of it. No comment yet from the credit industry, which until now has treated folks in these situations just the same as someone who doesn't pay their rent or cell phone bill. I'll have more later.
UPDATE: Fair Isaac tells me that later this year, a new scoring model will be released that lessens the impact of medical bills on credit scores. It's unclear how quickly the new score, called FICO 9, will be adopted. Here's the full response I received from Anthony A. Sprauve, a senior consumer credit specialist at FICO.
Medical debt is a serious issue affecting many Americans. Over the last 18 months, as part of our ongoing refinement of the FICO Score, our research of recent consumer credit data has led us to make changes in the way the FICO Score assesses collection agency accounts. FICO Score 9, which will launch later this year, continues to adapt to the changing credit landscape by using a more nuanced approach to assessing consumer collection data. As part of this refined credit assessment, medical collections will have a smaller impact than non-medical collections.