New Credit Scoring Models Won’t Work if Lenders Ignore Them

Chances are you’ve already heard some of the rumblings regarding the way new credit scoring models work. To recap, some of the newer models exclude any medical debt that consumers owe as well as the likes of settled delinquencies and collections. Under new scoring models, tax liens and civil judgments have also changed in the ways they are reported – all for the betterment of consumers. In a perfect world, this is great news for the consumer, as individuals are likely to see a boost in their credit scores and qualify for lower interest rates on long-term financed purchases like auto and mortgage loans. As a result of these changes, credit score boosts may be enough to qualify consumers that otherwise wouldn’t have even qualified for a loan. But there’s one problem – lenders aren’t embracing them to the same degree that consumers are. In fact, some are using old formulas to determine consumer risk that don’t exclude everything that we listed above.

New Credit Scoring Models Won’t Work if Lenders Ignore Them. New Credit Scoring Models Won’t Work if Lenders Ignore Them”

As a result of these changes, credit score boosts may be enough to qualify consumers that otherwise wouldn’t have even qualified for a loan.

But there’s one problem – lenders aren’t embracing them to the same degree that consumers are. In fact, some are using old formulas to determine consumer risk that don’t exclude everything that we listed above.

Why Aren’t Lenders Using New Scoring Models?

So just why aren’t the majority of lenders using the new scoring models and instead relying on old FICO scoring formulas? That’s a good question, and it’s one where the answer varies based on the lender. For instance, some lenders have stated that they’re too small and the older formulas are a better indication of potential consumer risk. Other lenders, conversely, say that they’re too big to institute changes in how they determine consumer risk and that any change this significant could be disruptive to the way that they do business. Then there are the lenders who are just simply putting off integrating such formulas.

Whatever the reason, the true loser is the consumer in all of this. In a way, lender refusal to use new credit scoring formulas discourages responsible credit behavior. Think about it: Why should a consumer be motivated to pay off a collection if a settled collection is still going to be counted against them on their credit report and credit score? The refusal of lenders to adapt to the current times and the newer scoring models could actually prevent consumers from enacting credit repair strategies.

Taking things a step further, the lender would also benefit by adopting these new scoring formulas. That’s because weighing consumers under the new scoring formulas would likely earn them new customers that may not have qualified for a loan before. New customers and more customers equal more revenue for a firm. Isn’t growing to become more profitable the goal of any business, big or small? Credit scoring is changing to become more consumer-friendly. Lenders need to be changing too. It should be a win-win for both parties involved.

Medical Debt: Accurate vs. Inaccurate

It’s recommended that consumers pull their credit reports at least once a year. Why? Because up to 20 percent of all Americans are estimated to have some sort of error on their report. Checking the report and taking the necessary corrective action is really the only way to have any issues resolved.

But according to a recent report in The New York Times, credit reports aren’t the only credit-related entity that’s problematic for consumers. In fact, The Times states that medical debt collectors are becoming a routine nuisance – and up to two-thirds of all who have complained to regulators about them say that they don’t owe the money that’s being asked of them.

Noting this, what can consumers do to decipher the difference between accurately and inaccurately reported medical debt? Here’s a look:

Medical Debt: Accurate vs. Inaccurate

The Times says that medical debt issues are the second largest debt-related complaint that is issued, only being topped by credit card complaints. Most experts state that issues related to medical debt are largely due to the current health care system as well as consumer confusion. However, The Times article also states that overaggressive debt collectors and debt collectors going after the wrong people can also pose an issue in medical debt collections. Here’s a look at how to better gauge if the medical debt you’re being asked to pay is accurate:

Keep tabs on your records and keep notices on any treatments, office visits or hospital stays, or notices that you’ve received and paid. If you’re ever in doubt, contact your health insurance provider to better understand what your plan covers as well as what your deductible and co-insurance is.
Contacted by debt collectors? Take note of the communication and refrain from making any immediate payments until you can contact your doctor’s office or insurance provider to understand whether you’re on the hook for said debt. If the collector is being abusive or acting illegally, immediately file a complaint with the Consumer Financial Protection Bureau.
If you do owe toward a treatment or procedure, don’t pay with a credit card. The interest you’ll pay on the debt can hurt you more long term.
Check your credit report annually: As we noted in the opening, doing so can help consumers sniff out any errors before they have a chance to hurt their purchasing power when applying for a loan or credit card, for instance. In the case of medical debt, it’s common for debt collectors to put small amounts owed on your credit report. However, these usually small amounts aren’t really worth it to aggressively go after for the collector, so it’ll just sit there. Noting this, it could blindside you.

The latest scoring system from FICO downplays the significance of medical debt as it translates to your credit score, so you don’t have to worry about a major impact to your purchasing power if you do need to settle a debt. It is important, however, to understand and get medical debt issues resolved.

New Credit Reform – Impact on Credit Reports

Credit reporting and credit scores have long been an area where the banks and reporting agencies held all the cards. Until fairly recently, FICO scores were closely guarded secrets. Errors on reports could easily keep you from qualifying for credit. And, it was difficult to dispute charges that marred your reports. But, a new agreement with the Attorney General’s Office in New York is leading the way toward fairer credit reporting practices.

An Easier Dispute Process

Roughly 10 million American consumers have been denied credit or been subject to higher interest rates because of errors that dragged down their credit scores. That’s about 5% of all US consumers who have credit reports. But, as part of their deal with the Attorney General, the three major credit reporting agencies are going to make it easier for individuals to report problems with their credit reports.

No Medical Debt for 180 Days

Millions of Americans have negative marks on their credit report because of debts from medical procedures and New Credit Reform. The new rules will increase the amount of time that must pass before you can be reported for an unpaid medical bill. The increased lead time will give you, your doctors and your insurers more time to negotiate payment without the risk of ruining your credit. You will have time to work with your insurer to find out what they cover and to make payment arrangements for what you must pay out of pocket. Combined with rules from last year that remove paid medical debts, this can make a significant positive different in many people’s credit scores.

Additionally, unpaid parking tickets, library fees and other small fines will no longer have the power to tank your credit rating. Debts that are not the result of contracts will no longer be allowed to appear on your credit report.

Disputes Reviewed by Humans

In the past, many credit disputes were automatically declined because they were handled by automated systems. Even if you legitimately did not owe a debt, the reporting agencies would decline to remove the black mark without thorough investigation. Under the new reforms, trained personnel will have to manually review the documentation for every credit report dispute. This provides a more nuanced process and reduces the risk of debts improperly left on people’s credit reports.

The changes will not appear overnight. Estimates show that it will be between 6 and 36 months for all of the reforms to go through. Plus, even with the changes, it will still be necessary to take steps like regularly viewing your credit report for errors or forgotten debts. In the meantime, let Key Credit Repair help you navigate this complex system and help you attain the home ownership opportunities you deserve. Feel free to Sign Up for $0 Today.

Inheriting Debt

Pop quiz: What happens to your debt after you die?

A) If you have a co-signer on your mortgage or credit cards, debt collectors will come after him/her for finance payments.
B) Your estate will pay off the remainder of your debt.
C) Certain debt is passed on in your will.
D) Creditors have to eat remaining debt.

Depending on your situation, all of the above may be true, whether you’re dealing with medical debt, mortgage payments or credit card debt. That’s because there are a lot of different scenarios that can play out depending on what arrangements a certain person has made – or didn’t make – when they were still alive.

Hypothetically speaking, say your spouse of 50 years passed away suddenly. You co-signed with your significant other on a home loan, which is paid off, and on a credit card, which has a $3,000 balance on it. Because you co-signed on the credit card, you’re responsible for paying it off. Failure to do so will be reflected in your credit history and credit report.

But say, for instance, that your 85-year-old mother passed away, leaving behind medical debt. Her estate would be responsible for settling this debt and then everything left over would go to her heirs. So, for example, the valuables your mother accrued over her lifetime – car, home, etc. – would be used to settle any outstanding debt. If there isn’t enough money to pay debt off, then her estate is declared “insolvent” and her creditors would have to eat the outstanding debt. So here’s a credit tip – if an estate is declared “insolvent,” heirs don’t have to worry about how any outstanding debt will impact them, meaning that no lengthy credit repair measures need to be enacted on anyone’s behalf – even if aggressive debt collectors still come knocking.

In some cases, however, someone may pass along a home with a balance on it to a loved one in their will. If that’s the case, this loved one is the new owner and can either decide to enact a debt management strategy to finance the remainder of the home or they could sell it and pay the remaining balance off with what it is purchased for.

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