Should you happen to be hit by a bus today, expect three forms of misery.
1. It will hurt.
2. You’ll be off work, and probably lose pay.
3. You’ll face big medical bills, and that may wreck your credit.
Since you didn’t plan to be hit by a bus, you may not be able to pay those medical bills on time and they’ll end up with collection agencies.
To the computers that make most credit decisions, your moment of bad luck makes you look like a deadbeat. You’ll be sentenced to seven years of credit purgatory — banned from the better deals on mortgages, auto loans and credit cards.
The good news here is that FICO no longer thinks that’s proper, and FICO carries some clout. It is the nation’s main credit scoring company. Its latest credit scoring revision — due for release this fall — gives less weight to delinquent medical debt.
Someone whose only black mark is medical debt would see their scores rise 25 points, FICO says.
The system has a gift for other troubled consumers too: It ignores all debt that went to a collection agency but was later paid in full. No longer would it curse your credit for seven years.
Debtors, however, should not break into cheers. Lenders will be very slow to adopt the new FICO model, and some probably never will.
Fannie Mae and Freddie Mac, which dictate the rules for conventional mortgages, still haven’t adopted FICO revisions made in 2009. Many other lenders haven’t either.
“It will have no effect in the very short term,” said Gerri Detweiler, director of consumer education at Credit.com and an author of books on consumer credit. “Over time, hopefully, it will offer change for consumers.”
That’s sad, because a single collection account can destroy a credit score.
The federal Consumer Financial Protection Bureau says a credit score of 780 would drop to 665 with one debt referred to collectors. That would turn a borrower with sterling credit into an outcast who would have a hard time landing a decent conventional mortgage.
Medical debt blindsides people. Families don’t budget for heart attacks.
Employers spent the past decade raising deductibles and co-pays, so health insurance is paying less. A family can fall behind on the bills.
Add to that the ridiculous complexity of medical billing and health insurance. Sick people often can’t tell what they owe and what the insurance company should pay.
“People will find a medical debt in collection without realizing they ever owed it,” said FICO spokesman Anthony Sprauve.
Someone caught in that mess is not a deadbeat. When the crisis passes, they’ll catch up on what they owe.
“Our analysis of the data shows that if unpaid medical debt is the only negative, it is not an indication of financial trouble or inability to pay debts. It’s an anomaly,” Sprauve said.
In fact, that’s just what the U.S. Consumer Financial Protection Bureau concluded last May in a report that urged lenders to treat overdue medical debt more kindly.
It’s a little harder to understand why FICO is now forgiving people who defaulted on other debts but later paid them off. If someone fell behind once, aren’t they more likely to default again?
Not if they have paid it off, according to FICO. “That typically means there are improving their financial situation and heading for a better place,” Sprauve said.
VantageScores, FICO’s smaller competitor, made that same decision last year. FICO contends it has 90 percent of the credit score market.
So, if all this makes sense, why aren’t lenders hurrying to adopt it?
Partly it’s caution. FICO just sent its new formula to the three big credit agencies — TransUnion, Equifax and Experian. They’ll check it against their own data to see if it better predicts defaults.
Then they’ll pass it on to their lender clients, who may or may not adopt it. Many have their own tweaks on FICO scoring systems, and they’ll want proof that the new method is better than what they’re using.
Acceptance is not a slam dunk. Some lenders think it may let true deadbeats slide by.
“There is a form of unpaid medical debt that is not related to a life event; it relates to weak, irresponsible consumer debt servicing behavior,” Tom Showalter, chief analytics officer at Digital Risk, a large loan processor, noted in a statement. “Such a consumer is not all that different from one who charges a credit card and then fails to pay.”