FICO, the company that measures credit risk, just made two important changes to the way it calculates the FICO Score. First, debt consumers repay after it goes to collection won’t count against them. Second, FICO will downgrade the importance of medical debt, so that people with unpaid medical bills won’t be lumped in with those who don’t pay their mortgage or credit card.
I called for this change a year and a half ago (Should medical debt count against your credit rating?) Here’s what I wrote at the time:
As far as I’m concerned, a lot of medical debt isn’t real debt. Real debt is borrowing money from a bank to buy a car or using a credit card to finance a vacation or taking out a student loan to pay for college. Borrowers know ahead of time that they are incurring a financial obligation for a known amount of money for specific goods or services. They have the opportunity to choose what to buy and from whom or not to buy at all. Prices can be compared across different sellers.
Some medical debt is like the real debt described above, but a lot is not. Hospitalized patients receive bills that are often indecipherable, incorrect, and owed by an insurance company. Even when technically correct the amounts can be non-sensical and vary widely from provider to provider. Patients don’t voluntarily incur these expenses –sometimes they aren’t even conscious when the decisions are made. Unlike in typical industries, providers charge patients vastly different amounts for the same services. They often charge the most to those who lack insurance and have lower ability to pay. They also expect a significant percentage of patients not to pay at all. In fact, hospitals may even boast about how much “uncompensated care” they provide.
It’s about time we stopped pretending medical debt was equivalent to other kinds of debt. Fair Isaac has just gotten a bit fairer.