You know the drill… You go to the doctor and give them your insurance card. You typically pay a co-pay. If you have a deductible, you might pay that upfront. After you leave the appointment, the doctor or hospital submits a claim to your health insurance company for payment of the allowed amount. Depending on your plan, maybe your insurance covers the entire bill; but more often than not, you receive an invoice showing a balance due. Thinking the insurance company will pay it eventually, you ignore it… and this is where the trouble starts.
THE BAD NEWS: Contrary to what most people think, medical providers don’t wait very long to get paid. It’s not uncommon for them to sell unpaid bills to collection agencies within a few months. The worst part is that you might not even be aware it’s happened. Up until now, if a collection appeared on your account, it could instantly drop your credit score 50-80 points. It’s true that with each passing year, less and less negative weight was given to it, but a collection negatively impacted your credit for seven years. This was true, even if the collection was paid in full.
THE GOOD NEWS: This past week, Fair Isaac Corp. announced that if a collection account is settled by the consumer, it will no longer be counted in credit score calculations. In addition, less weight will be given to unpaid collections currently held by a collection agency. This is good news that’s long overdue. They finally succumbed to pressure from consumer groups and the CFPB, (Consumer Financial Protection Bureau) who conducted a study and discovered that approximately 107 million consumers had a collection on their credit report this year; 65 million of which had a medical collection, and 10 million of those had no balance due on the account. Talk about a HUGE positive impact! The new model, FICO09, will be released this fall to the credit reporting agencies and later this year to lenders.
While lenders are under no obligation to use the new model, it’s expected that automobile and credit card lenders will likely adopt this new version once it’s rolled out. Mortgage lenders, on the other hand, typically use models that two versions old and are unlikely to adopt unless they come under industry pressure to do so. Our hope is that pressure from industry groups like the National Association of Realtors and government agencies like the CFPB can influence Mortgage Lenders to jump on the FICO09 bandwagon, since we all know that small changes in credit scores can make the difference in whether or not a loan is approved.
While most people are aware that having good credit is important, most don’t quite understand how to establish good credit, so we’ve created a video that explains exactly how your overall credit score is calculated. To learn more, watch our “Credit Scoring Basics” video HERE!