Will FICO 9 Fix My Medical Debt?

Health, Managing Medical Bills
FICO 9 medical debt

Upcoming changes to how credit scores are calculated could be good news for millions of Americans. An estimated one in three Americans struggle to pay their medical bills, and changes announced by FICO earlier this month mean these people and those who have struggled with medical debt in the past could see improvements in their credit scores, making it easier to get a loan, a credit card or purchase a home.

FICO is responsible for calculating the credit scores used by most institutions as they decide whether someone is a good credit risk. On August 7, FICO announced changes to its analyses that will give less weight to medical debt and eliminate collection accounts that have been satisfied. This latest version of the credit scoring analytics, known as FICO 9, will be rolled out sometime this fall and is expected to increase credit scores for millions of Americans impacted by medical debt.

These changes are an effort to make the credit scoring system a more accurate predictor of consumer credit risk. Earlier this year, a report from the Consumer Financial Protection Bureau (CFPB) said Americans are being unfairly penalized for their medical debt, which is not indicative of their creditworthiness. In other words, this medical debt — often unexpected and well-beyond your control —shouldn’t play such a significant role in your ability to get a line of credit or a loan at a fair interest rate.

If you are one of the millions of Americans struggling with medical bills, you understandably have questions about these changes. Here are your answers.

Does FICO 9 remove past medical debt?

FICO 9 will give less weight to medical debt, but it will not completely eliminate the effects that debt has had on your credit score. Remember, FICO handles your credit score, not your credit report. (For more on the difference, see here). Under the past FICO model, there was no distinction between medical debt and all other kinds of debt; debt was debt. Because medical debt is not necessarily a good indicator of whether someone is a good credit risk, lessening its impact will boost your score but won’t eliminate its effects altogether.

FICO 9 will also disregard medical accounts that were in collections but were ultimately paid off or settled. A study from the Federal Reserve says more than half of all collection accounts reported on credit reports are medical, many of them long-satisfied. This change means if you had a medical bill that went to collections, but you have since paid it off or otherwise satisfied the debt, it will no longer impact your score.

How much will my credit score change?

The change you can expect to see in your credit score depends on all of the factors impacting it now. If medical debt and accounts in collections are tarnishing your score now, but you have an otherwise clean credit history, the changes could be significant.

Accounts sent to collections can normally affect your credit for as many as seven years, even after they’ve been paid off and by as much as 100 points. Under the FICO 9 changes, if this debt has been satisfied, it will no longer impact your score. As for giving less weight to medical debt, an otherwise clean credit report could see a 25-point increase with the changes.

How does this affect my ability to get credit or loans?

Your ability to take out a loan or get a new credit card with a newly adjusted credit score will depend on how the new scoring model is adopted by lenders. FICO 8 was adopted in 2008, but only about half of FICO customers have begun using that model, according to the New York Times. Mortgage lenders in particular have been historically slow to adopt the changes. But for lenders that are onboard, borrowers who have previously struggled to get a competitive interest rate or an approval at all will see definite changes.

With increasing attention on medical debt and the struggle of millions of American households to pay their medical bills, lenders may feel pressure to adopt FICO 9. An earlier NerdWallet study found the majority of personal bankruptcies are medical bankruptcies, a fact that is difficult to ignore and getting significant media coverage.

Do the changes affect my current debt?

The changes of FICO 9 only affect the reporting of your current medical debt. They do not have any impact on how much you owe or arrangements you’ve made with medical providers, creditors or collection agencies.

If you can’t afford to pay off your medical debt, you are not alone. NerdWallet estimated 1.7 million Americans live in households that would declare bankruptcy due to medical debt in 2013. If you are struggling with medical debt, a medical bill advocate may be able to help. Medical bill advocates are professionals experienced in dealing with medical providers and the people who owe them. They can audit your bills for errors and insurance coverage problems and work to lower your bills by negotiating with medical providers, sometimes saving you thousands of dollars.

How can I check my credit score?

Federal law entitles you to a free copy of your credit report once a year. However, getting your credit score is not so simple. Companies such as FreeCreditScore.com, PrivacyGuard and TransUnion all offer access to your credit score in exchange for a membership fee of about $15 a month. You can work around paying the fee by canceling your service within the grace period.

What else can I do to manage my credit score?

NerdWallet strongly encourages all consumers to take advantage of the free annual credit report and look it over for errors to keep your credit score current and as accurate as possible. Paying your bills on time, keeping your debt low and staying under your credit card limits are other simple ways to keep your credit in line.

Money and stethoscope photo via Shutterstock.

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