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Medical Collections Are Not As Important As Credit Scores Believe

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Last week the newly formed Consumer Financial Protection Bureau (or “CFPB”) released the results of a study that proves that medical collections are treated too harshly by credit scoring models. Their analysis also suggested that consumers who owed some amount of medical related debt were not as risky as consumers who owed non-medical related debt. And, finally, that credit scoring systems underestimated the credit quality of consumers who had paid off medical related debt.

Medical debt, which is accumulated when visiting a doctor’s office or some sort of medical service provider, is commonly outsourced to third party collection agencies when it goes into default. And, collection agencies normally place those collections on the credit reports of the defaulted consumers. Collections can lead to lower credit scores and will generally remain on credit reports for up to seven years.

Current and prior versions of the FICO credit scores treat collections the same way whether medical, non-medical, paid or unpaid. Collections are considered to be major derogatory items and can, but don’t always, cause lower credit scores. In FICO’s latest, and yet to be released, credit score generation called FICO Score 9, medical collections, including paid medical collections, will have a smaller impact than non-medical collections, according to Anthony Sprauve, FICO’s Senior Consumer Credit Specialist.

The newest version of the VantageScore credit score (Version 3.0) ignores any and all collections that have a zero balance. The VantageScore credit scores do consider all collection types that are unpaid. What this means is if you have a medical collection and you end up settling it, or paying it, then once it’s updated to show a zero balance the newest VantageScore will completely ignore it.

The CFPB’s study found that medical collections are not as predictive of increased credit risk as non-medical collections. They also found that paid medical collections are not as predictive of increased credit risk as unpaid medical collections. This suggests credit-scoring models should discount medical collections, to some varying extent, whether or not they are paid or unpaid.

It’s commonly known the lender, by way of their policies, discount the value of medical collections. They know that consumers don’t choose to get sick and incur large amounts of uncovered medical expenses. They also know that in many cases the cause of medical collections on credit reports has less to do with irresponsible consumers as it does with the inherent problems with medical billing and insurance processes.

The CFPB study seems to validate the actions already being taken by FICO and VantageScore Solutions as they, by way of their model redevelopments, have already discounted paid and unpaid medical collections. This is good news as credit scoring models don’t need to become influenced by way of anything other than hard data findings. Finally, it’s unclear that the CFPB has enforcement authority over credit scoring systems so even if FICO and VantageScore Solutions were not already treating medical and paid collections differently, in favor of consumers, it’s not clear the CFPB could do anything about it.

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