With all the talk about health care and insurance these days, few people mention the ways in which insurance companies pad their profits and just how destructive their practices are to American consumers’ credit scores.
How do they pad their profits?
- By denying or limiting coverage for many things, leaving their insureds to pick up the slack.
- By simply delaying the payment of charges that should be paid under their coverage.
According to an article in the Wall Street Journal, as of July about 64.3 million Americans had a medical collection on their credit report – and some aren’t even aware that it’s there. They assumed their insurance provider would take care of those bills (as promised) so didn’t worry when they got past due notices.
How do they harm American consumers?
First, by not informing them when bills will not be paid. Second, by letting bills they should have paid go into collection – causing those consumers’ credit scores to plummet.
Some say that the consumer should have known and should have paid the bills themselves as soon as they got the first past due notice. There are two things wrong with that idea: One is that they might not have the money to pay an unexpected bill. Second is that they’ve paid for the insurance and they’re trusting that their provider will come through.
Unpaid medical debt is on the rise. According to a report released last year by the Commonwealth Fund, as of 2012 41% of U.S. adults (75 million consumers) had trouble paying medical bills. This is up 29% from 58 million in 2005. Part of this is, of course, due to some citizens’ complete absence of insurance coverage in the face of rising rates.
What’s the good news? Big changes in credit scoring.
Fair Isaac Corporation, the nation’s foremost credit scoring bureau, just announced changes to their scoring model.
Their new model will give far less weight to medical collections – a change that could add 25 points to many borrower’s FICO scores.
Since a mere one point can often make the difference between acceptance and denial or acceptance at a lower rater versus a higher one, a 25 point jump is significant.
The expectation is that credit card issuers and auto lenders will implement the new scores first, with mortgage providers being slower to come on board. This is a prediction based on the fact that many lenders are still “two versions behind” in upgrading to the latest scoring models. (Lenders have a choice of which model to use when requesting credit reports.)
Good news, part two:
Fair Isaac also announced that they will discontinue inclusion of collections that have been paid off or settled. This is in bold contrast to the present model, which keeps collections on a consumer’s credit report for up to 7 years.
Collections, even if they’ve been paid in full, can lower a person’s credit score by as much as 100 points. Dropping them is a significant step forward for consumers who are struggling to rebuild credit after a financial blow. If you apply for a loan, you should also remember that there are different credit scoring models, so VantageScore 3.0 vs FICO issue also remains and can effect the final decision on your loan.
Of course there are critics. Some believe the changes will encourage those who can’t handle debt to dive back in and repeat the process.
And of course that could be true for some consumers. But for those whose financial troubles stemmed from the crash of the housing market, the new scoring system will be the blessing that allows them to become homeowners once again.
Are you ready to begin the search for a new home?
The first step is to become pre-approved for your mortgage loan, and we’ll be happy to do that for you. Reach us by phone at 1-800-232-7409 or apply on line at http://www.mikeclover.com.
And remember, we’re now serving clients in both Texas and Washington State.
18170 Dallas Parkway
Dallas, TX 75287
Apply at: www.mikeclover.com