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Getting sick has led to millions of Americans paying more for car loans, mortgages and credit card debt – thanks to a medical debt domino effect. But slowly, that’s changing.

Several factors are coming together to fundamentally change the way unpaid medical bills impact Americans’ financial lives. The biggest one might also be the most subtle: the newest FICO score model treats unpaid medical debt differently from other kinds of debt. The changes could mean an immediate 25-point boost for consumers whose only credit report blemish is an unpaid doctor or hospital bill.

The new medical-debt-friendly FICO score, called FICO 9, is filtering through the financial system even as government regulators are forcing other changes in the way lenders consider medical debt. Under a settlement reached recently with several state attorneys general, the nation’s credit reporting agencies are now barred from adding medical debt to a consumer’s credit report for 180 days, which gives consumers time to settle the often complex negotiations between providers, insurance firms and their own checkbooks. Late last year, the Consumer Financial Protection Bureau released a report that criticized credit-scoring models for relying so heavily on health-related entries. Half of all negative entries on credit reports involve medical bills, the CFPB found, impacting one in five U.S. adults. The report noted that, because of the complexities of insurance payments and billing procedures, many consumers are not at fault for unpaid bills; and many times, red tape delays resolution for months or even years.

“If a credit score is supposed to be a predictor of a consumer’s likelihood of paying back a debt, these findings raise serious questions about how medical debt collections items affect a consumer’s credit score,” CFPB director Richard Cordray said at the time.

New Findings

FICO says new research shows that unpaid medical debt doesn’t necessarily mean consumers are a bad credit risk. Put in algorithmic terms: Consumer with unpaid bills get lower credit scores because they are more likely fail to pay bills in the future; but unpaid medical bills fall into a special category, and consumers with unpaid medical bills aren’t as likely to miss other payments in the future, so those debts shouldn’t ding credit scores as much.

“We introduced two sets of variables in the FICO Score 9 algorithm — one set that evaluates only unpaid medical collections, and one set that evaluates only unpaid non-medical collections. This differentiated treatment resulted in unpaid medical collections having a smaller impact on the FICO Score than unpaid non-medical collections,” FICO says

The FICO change is the result of better data collection by the credit bureaus, FICO says.

“As data scientists, we constantly challenge ourselves to make the FICO® Score more reliable and predictive,” FICO said in a blog this week. “Thanks to enhancements in the data elements captured in the bureau file, it became possible in the past few years to distinguish medical and non-medical collection agency accounts at all three major credit bureaus.”

It’s important to note that this isn’t a free ride to avoid settling medical bills. Instead, FICO 9 creates a kind of middle tier, between folks with perfect payment histories and those with unpaid non-medical debt. And that “middle” tier is a lot closer to the bottom than the top.

“While consumers with unpaid medical collections are less risky than those with unpaid non-medical collections, they are still substantially more risky than the population with no derogatory information in their files,” FICO says.

For example, consumers with unpaid non-medical debt and with their most recent collection incident in the past 12 months fail to pay a bill at about a 30% “bad rate.” Whereas consumers with only medical debt fail to pay at slightly less than 25%, according to a chart released by FICO. Consumers with no derogatory entries fail to pay at around 2%.

When Will Consumers See a Change?

The estimated 15 million Americans with only medical debt on their credit reports stand to gain the most from the change, but it’s unclear when the score jump will happen at their financial institutions. New credit scoring models can take years to filter through the financial system, for reasons Gerri Detweiler explains in this story. Basically, a new score is like a software update, and many firms are very careful about upgrading. Some lenders use FICO scores as an element in their own proprietary scoring formulas, so a new FICO formula can take even longer to integrate at those firms.

FICO isn’t saying how quickly FICO 9, released during the fall last year, is being adopted.

“FICO makes adoption of new score versions as seamless as possible,” said spokesman Jeffrey Scott. “Many of our top clients are currently evaluating the new version and we expect to see them move to FICO Score 9. Some FICO clients are already using FICO Score 9. ”

FICO 9 includes another enhancement that will be welcome news to consumers who are trying to clean up their credit. When they fully pay off accounts that have been sent to third-party collectors, those bills will no longer be factored into their credit scores. The initial late payments to the primary lender will still be weighed, however.

Consumers who’ve been dealing with medical debt should get their credit reports and scores regularly to see how, or if, those debts are being reported. You’re entitled to a free credit report from each of the three credit reporting agencies every year. You can also get a free credit report summary on Credit.com for an overview of how your debts are affecting your credit scores.

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