Ever found yourself being locked out on a loan because apparently you have a medical debt collection which you never knew you had? Or ever recorded a bad credit score because you had a medical debt you were willing and able to clear? Well, that has been the story of more than 200 million Americans.
For a long time, debt collection has caused a lot of concern lodged to the CFPB by Americans with medical debts glassing off as the top debt. Earlier this week, the three largest credit-reporting agencies, namely, Equifax, Experian and TransUnion passed on a new policy agreement, which would see many Americans who have for long been affected by bad credits due to medical debts, breathe a sigh of relief. This move is what has been seen by credit experts like John Ulzheimer, to be the biggest change in credit reports.
Consumers would in the past be caught unawares to find out that they have a medical debt in their reports and would not be able to correct it at the time. Due to this, the agencies a policy in place that any bad medical debt would not be reported until after 180 days to give time for the insurers to clear out their payments. A study by the Federal Reserve Board found that more than a half of all bad credit reports were due to medical bills. This triggered the agencies to offset consumers of that burden since it was as a result of insurance delays and not their blame. This policy also turns out to be the solution to the problem of immediate bad reports given by doctor’s offices about the debts before asking.
A research report by the Consumer Financial Research Bureau showed that consumers were being overly charged for their medical debts. A collection in the medical debt would see a consumer’s credit score drastically drop by about 10 percent. This prompted the credit score provider, FICO, to change their formula for calculating scores so as to reduce the effect of bad medical debts.
A lot of bad medical debts which had not been cleared are what led to debt collection, this negatively affected the credit score. A credit score is used for over 200 million people by lenders to check their creditworthiness. Due to this, the three agencies saw it wise to improve the accuracy of the credit reports. This led to another measure whereby a debt once paid would be immediately removed unlike previously. This would see an improvement in the consumer’s credit scores.
Benefits of the policy.
The 6-month wait will see to it that the insurer complete payment before a credit report and thus consumers will maintain a good credit score.
This grace period will also allow the consumers and the insurance companies to resolve their disputes over the payment of the bills. This would also enable the insurance process to fully take place and verify the medical claim before it is reported as a debt.
The removal of all medical debts once they have been cleared would enable the consumers to have clean credit reports as most collection problems would be deleted.
Although it is hard to clear up all collections, the new formula for calculating the credit score by FICO would result to the medical debts having a low impact on the score.
The policies put in place would allow the over 200 million people across the US not to be locked out on loans. The fact that all paid debts would be deleted; consumers would put off the burden of having poor credit records due to medical debts.
In an effort to increase the accuracy of the credit reports, the consumers should be kept informed about their various debts before recording them as some may be willing and able to pay for them.
These policies are indeed good news to many since more than half of the bad reports are actually from medical bills. This policy once adopted by lenders would see consumers affected, being able to access loans and get reasonable interests for them.
It is however important to realize that it would only affect borrowers who had big medical debts and not all of the other non-medical debts.
This move should be considered also for other non-medical debts since it would also serve to help those not affected by this.
The policy of changing the formula for calculating credit scores in respect to medical debts is good. The false belief which people had, that medical and non medical debts are the same saw consumers being penalized hugely. The plain truth, however, is that medical debts are not good predictors of a person’s creditworthiness.
It is without a doubt that this move would have a great impact on the lives of many Americans. Since the credit score helps one even secure employment, this change would in the long run, lead to an increase in their livelihoods due to access to loans.
This is indeed the right direction for credit agencies to take. Caring for the needs of the people goes a long way in getting their job done and also making a positive impact to the world at large. It is a project worth being emulated by other countries.