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Medical expenses may not be a good predictor of creditworthiness

Credit scores are important to lenders because they are considered a good predictor of the ability and likelihood of people to pay back credit that is extended to them. That is why those with higher credit scores are able qualify for more loans at much better interest rates than those with low credit scores.

Credit reporting agencies use computer algorithms to come up with a 3-digit credit score number that is used to determine a person’s creditworthiness. However, it may be time for credit reporting agencies to understand that not all types of debt are created equal, and to take that into account in their scoring systems. 

A recent study by the Consumer Financial Protection Bureau looked at over 5 million credit scores and followed their owners for a period of two years. The study determined that computer algorithms that create credit scores may put too much emphasis on things like past-due hospital bills. Simply put, the study found that having unpaid medical debt does not have as big of an impact on a person’s credit risk as other types of debts, such as unpaid credit card debt, unpaid phone bills, and evictions.

This may be because people who obtain other types of debt are more likely to know what they are getting into prior to obtaining the credit. They usually have an opportunity to read a contract and understand the terms, such as the amount being borrowed and the interest rate. That is not always the case with medical debt. When a person unexpectedly becomes ill or has an accident, he or she seeks treatment. The price and payment terms are almost never agreed upon ahead of time. Further, medical billing systems and insurance copays can often seem clouded in mystery.

According to the Federal Reserve, 50 percent of collection activity that shows up on credit reports is unpaid medical debt. Given the scale of the problem, it is safe to conclude that some of this collection activity is being directed at New Hampshire residents. Such unfair weighing of creditworthiness based on medical debt can have a huge impact on consumers and the economy. If you have found yourself in the unfortunate situation of having unexpected, unmanageable medical expenses, it may be a good idea to talk to a debt relief attorney to make sure you understand your options.

Source: CNBC, “Credit alert! Unpaid medical bills unfairly hurt scores,” Herb Weisbaum, May 21, 2014

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