A few weeks ago I spoke with a father from Dana Point. He told me his son was recently in a major accident. Over the course of several months the family was in and out of the hospital and medical bills started piling up. Fortunately the son is expected to fully recover, but the family’s finances have taken a big hit.
Unfortunately, this story is familiar to many other hard-working, responsible Americans around the country. An unexpected medical expense can quickly send the most diligent and responsible people into financial trouble. Those unpaid debts go to collections and can cause a major hit on a credit report and score. Once a person’s score drastically drops, it becomes hard to get a loan or refinance debt without a staggeringly high interest rate.
After FICO’s biggest customers (including major lending institutions) reportedly suggested that overdue medical debt was unduly weighing on consumers’ credit scores, FICO decided to recalibrate its Credit Scores [source]. The newly announced model, known as FICO Score 9, might enhance your credit score, reduce the importance of overdue medical bills and remove blemishes on once late, paid-off accounts.
This is great news for today’s borrowers. FICO Score 9 is supposed to make obtaining loans easier for consumers who have settled bad debt or overdue medical payments. The adjustments are expected to raise the median score for consumers whose only major delinquency is an unpaid medical bill by up to 25 points. The new system will improve the credit record of many borrowers, and will also enhance the risk-assessment capability of lenders. Therefore, this change will likely make it easier for certain prospective home buyers to obtain a mortgage.
Under the current model, a collection generally stays on a credit report for seven years -even if it is paid off. Seven years is the same amount of time bankruptcies and foreclosures stay on a report. Now, consumers will see their paid collections being removed from their credit reports. According to The Wall Street Journal, of the 106.5 million consumers with a collection on their report, 9.4 million had no balance. Those 9.4 million American won’t be penalized under the new credit-score system.
According to the Federal Reserve, more than 50% of all debt collection on credit reports stems from medical bills. Even if you have typically been a great client, a medical issue could previously have caused your FICO score to plummet [source]. Consumers however end up with medical debt for different reasons than they incur other debt (such as home loans or credit card debt). For instance, some individuals do not realize they owe money due to confusion about the amount covered by insurance companies related to medications or procedures.
Keep in mind that even with these ”relaxed” standards, planning for an unseen future event is still solid practice. Use part of your savings to build an emergency fund, and stick to your budget. Are you thinking about buying a home? Make sure to talk to a mortgage lender first to see how this will impact your financial situation.
About Jaleesa Peluso
Jaleesa Peluso is a Laguna Beach Real Estate Agent. She specializes in coastal homes and luxury home marketing. For more information visit: www.jaleesapeluso.com. Contact: (949) 395-0960 or Jaleesa@JaleesaPeluso.com