On Keeping Medical Bills From Hurting Your Credit Score

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Paying your medical bills is becoming more complicated, particularly as more patients become responsible for a greater share of their medical costs. And often, hospitals and other providers are turning over bills more quickly to collection agencies.

The problem, as my article on Saturday outlines, is that medical bills can be riddled with errors. Or, it may just take you many months and phone calls to figure out how much you’re really obligated to pay, or why your insurer is dragging its feet. But if you take too long to untangle the mess, it could end up hurting your credit score. If a medical provider hires a collection agency to collect the money on its behalf, credit experts said there’s nothing stopping them from reporting the delinquency to the big credit reporting bureaus. Debt collection experts said that it was ultimately up to the medical provider to determine when the debt got reported.

A consumer has 30 days to dispute the debt (from the time the debt collector initially reaches out to them) with the collector. And if the consumer disputes the cost, the collector is supposed to “cease collection of the debt” until the collector can verify the debt with, say, a copy of a judgment. “That would seem to include notice to the credit bureaus,” said Robert J. Hobbs, deputy director at the National Consumer Law Center and author of “Fair Debt Collection” (National Consumer Law Center, 1987). But “it’s a gray area of whether that is actually a collection effort.”

The Consumer Data Industry Association, a trade group for the big credit bureaus, said that consumers could also request to have the debt deleted from their credit report if the debt was invalid. But as we’ve reported before, disputing errors is not always an easy process.

“You’ve got this mishmash of consumer protection laws that might provide some protection, but aren’t specifically designed to protect consumers against medical billing problems,” said Gerri Detweiler, a credit expert with Credit.com. “We’ve given collection agencies a lot of power to harm consumers’ credit reports due to medical problems, without proper checks and balances.”

The article also discusses legislation that would erase medical debt from credit reports within 45 days of being settled or paid. Supporters of the bill said it would help people whose credit scores were unfairly damaged, while critics argued that it would undermine the value of credit reports because it does not distinguish between people who were truly delinquent and those who were the victims of billing errors or other mistakes.

Has your credit score been damaged by medical bills? What do you think of the legislation? Please share your experience in the comment section below.

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Consumer Agency Seems to Soften Limit on Credit Cards Fees

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The agency, the Consumer Financial Protection Bureau, introduced a proposal that would make it easier for credit card issuers to charge fees before borrowers’ accounts were officially open.

The bureau, which began overseeing many consumer financial products last year, said it was issuing the proposed rule in response to a federal court decision that challenged how the Credit Card Act was being applied. The act, which took effect in February 2010, put several rules in place aimed at curbing abusive lending practices.

Part of the new law said that credit card issuers could not charge fees equal to more than 25 percent of the borrower’s credit limit in the first year after the account was opened. But after certain credit card issuers started charging application or processing fees before consumers’ accounts were opened, the Federal Reserve expanded the rule so that the fee limit would also apply to those upfront charges. That’s the piece of the rule that the consumer protection agency, which has since assumed regulatory authority, is proposing to eliminate.

The bureau declined to say why it took this course. But some consumer advocates said they believed that the consumer agency, led by Richard Cordray, may be backing down because it has decided to “pick its battles,” while trying to show that it is not unfriendly to business.

But other advocates said they could not understand why the agency was not taking a more aggressive stand. “Even if it is a small rule, it affects the most vulnerable of consumers — consumers with impaired credit records, often of limited means, who end up with these expensive fee-harvester cards,” said Chi Chi Wu, a lawyer at the National Consumer Law Center, referring to cards marketed to people with tarnished credit histories. “Exactly the sort of consumers that we think C.F.P.B. should stand strongest for.”

The bureau’s proposal stems from a ruling in September by the Federal District Court for South Dakota that granted a preliminary injunction blocking the rule on the upfront fees from taking effect. To resolve the matter, the consumer agency said it was seeking comment on whether it should revise the rule so that it no longer applies to fees charged before an account is opened.

The initial lawsuit that led to the federal ruling was brought in July 2011 by First Premier Bank of South Dakota, which issues cards to borrowers with troubled credit records. The bank told the court that it would “suffer irreparable harm” if it were not allowed to collect the upfront fees. “The regulation will threaten First Premier’s very existence by causing the loss of millions of dollars in profits,” the bank said.

It also argued that it is “one of the few businesses in the country that offers such high-risk borrowers the chance to rebuild their credit history.”

A First Premier spokeswoman, Brenda Bethke, said Thursday that the bureau’s proposal is under review by its legal counsel and declined to comment.

Odysseas Papadimitriou, chief executive at CardHub.com, a credit card comparison Web site, said that to his knowledge, First Premier was the only bank that has been trying to make up for revenue that had been crimped by the new credit card regulations by charging more upfront fees. “However, you can count on other banks to start doing the same thing if consumers embrace these high-fee credit cards,” he added. “A smarter strategy for the C.F.P.B. might be to drop the amendment and the associated legal battle but require any issuers that charge fees before the account is opened to send a notice that clearly shows consumers how much their credit card will cost them.”

But some consumer advocates said they still believe that the fees are egregious enough to warrant more of a fight. They said First Premier began charging a $95 processing fee before the card account was opened, as well as a $75 annual fee. Yet the credit limit on the card was $300.

“The C.F.P.B. should not back down in protecting consumers from this sort of chicanery,” Ms. Wu said.

The consumer agency said all comments on its proposal must be received by June 11.

“We welcome and want public feedback on this proposal,” the agency said.

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Mortgages - How to Pump Up Your Credit Score

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A majority of banks are less likely to offer loans to people with a FICO credit score of 620 and a 10 percent down payment than they were in 2006, according to the report. Lenders were also less likely to do so even for those with a score of 720.

Such stricter standards have drawn the attention of Ben S. Bernanke, the chairman of the Federal Reserve, who last week told a bankers group that “current standards may be limiting or preventing lending to many creditworthy borrowers.”

For those with lower credit scores, the math is stark: A borrower with a credit score of 720 can expect a rate of 3.70 percent on a 30-year, $300,000 fixed-rate mortgage, according to myfico.com, while someone with a score of 620 to 639 can expect a 5.07 percent rate — or an extra $242 per monthly payment.

“If you don’t have good credit, you’re not going to get that crazy low rate,” said Deborah MacKenzie, the director of counseling at the Housing Development Fund, a nonprofit group in Stamford, Conn. But she and other experts said there were tactics that consumers could use to raise their scores.

First, though, it is worth noting that median credit scores are rising, as people reduce debt and spend less in tight economic times, said Joanne Gaskin, the director of product management and global scoring at FICO, the provider of one of the most popular credit scores used by lenders. Some 18 percent of Americans now have scores of 800 to 850, while 15 percent are below 550, according to FICO data. Through “good behavior,” Ms. Gaskin said, you could raise your credit score by as much as 100 points in a year.

Often lenders will review your scores from the three big credit agencies, and they use the middle number to evaluate you. “That becomes your risk number,” said Tracy Becker, the founder of North Shore Advisory in Tarrytown, N.Y., a national credit score specialist.

Start by obtaining your three credit reports (available free once a year at AnnualCreditReport.com, or call 1-877-322-8228), and study them carefully for errors or omissions. If you think your score labels you as a higher risk, Ms. MacKenzie suggests signing up for a first-time homeowners class through a counseling agency certified by the federal Department of Housing and Urban Development.

According to FICO, the two biggest factors in your credit score are your payment history, which accounts for 35 percent of the score, and the amounts owed, accounting for 30 percent.

Knowing that, Ms. Gaskin said, an effective way to raise your score is to reduce your balances on credit cards. She notes, however, that if an account is in collection, it is too late to improve your credit score by paying it off. The notation that an account is in collection is what lowers the score, she said, so consumers may get more mileage by paying down active credit-card balances and other debts first.

Though mistakes and bankruptcies may stay on your credit report for seven years, lenders will generally be more likely to overlook late payments that happened two or more years ago than more recent ones, Ms. MacKenzie said. “A late payment that occurs this month when you’re applying for a mortgage is deadly,” she said.

Another way to bolster your credit is by asking creditors with whom you have a good track record to report to a credit agency, Ms. Gaskin said. That could include a landlord or a utility.

Improving your credit could take three to four months, or it could take as long as 18 months. “It isn’t an easy fix,” said Carol Yopp, a program manager for the Long Island Housing Partnership and a former mortgage underwriter. “Don’t expect it to happen overnight.”

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Report Finds Improvement in Credit Scores

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5/4/12 | Updated to correct a figure.

The number of consumers with top-tier credit ticked up to its highest level since 2008, according to a report from the creator of the FICO credit score.

An analysis by FICO, formerly known as Fair Isaac Corporation, found that 18.3 percent of consumers with FICO scores had scores of 800 to 850, the highest range of scores available. (In 2008, 18.7 percent of consumers fell in that range.)

FICO scores range from 300 to 850 and are used by most lenders to gauge a potential borrower’s creditworthiness. The higher your score, the more favorable the interest rate you’re likely to get on a loan.

FICO’s report is based on an analysis of a national sample of credit reports as of October 2011 provided by Equifax, one of the three major credit reporting agencies.

The report found, though, that just 15.5 percent of consumers had scores in the 700 to 749 range — the lowest that FICO has recorded since it began tracking such data in 2005.

Rachel Bell of FICO Labs, FICO’s research arm, said many consumers had stepped up their efforts to maintain an excellent credit profile, by paying bills on time and using credit wisely. That’s why they have moved into the top tier.  But the lingering financial stress of the recession and a tight job market have pulled others into lower tiers.

The report said the proportion of consumers with scores in the lowest tier — 300 to 549 — was 15 percent, the lowest since 2006.

One likely explanation, Ms. Bell said, is that lenders have written off bad debt and closed their riskiest credit accounts. Negative items carry less weight in a credit score as time passes, she said, so credit scores will move up for consumers who had multiple bad debts and delinquencies, but who are now staying current.

John Ulzheimer, who blogs about credit at SmartCredit.com, said what struck him was that more than half of consumers — 53.2 percent — still had credit scores over 700.  That’s down from 54 percent in 2006 and 2007, before the full impact of the credit crisis. But it suggests that the “gloom and doom perception about credit scores falling off the table” because of the economy “simply isn’t true,” he said in an e-mail.

In general, you must pay to obtain your FICO score (although you can get it without charge if you sign up for a free trial of other products on www.myfico.com).

But you can check your credit report — on which your FICO score is based — free on www.annualcreditreport.com.  Each of the three major credit bureaus (in addition to Equifax, they are TransUnion and Experian) must provide consumers one free copy of its report each year. So you can check a different report, free, every four months.

Have you checked your credit score lately? Has it gone up or down?

This post has been revised to reflect the following correction:

Correction: May 4, 2012

An earlier version of this post misstated the range of scores in which 15.5 percent of consumers fell. It was 700 to 749, not 700 to 799.

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Medical Debts Can Leave Stains on Credit Scores

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But by then, it was already too late. Unbeknown to Mr. White, the debt had been reported to the credit bureaus. It was only when he and his wife went to refinance the $240,000 mortgage on their home in Lewisville, Tex., last month — nearly six years after the accident — that he learned the bill had shaved about 100 points from his credit score. Even with no other debts, a healthy income and otherwise pristine credit, the couple had to pay an extra $4,000 to secure a lower interest rate.

“It wasn’t like I ignored it,” said Mr. White, 47, an executive in Internet advertising. “It’s not like I’m a credit risk in any way, shape or form.”

Even people with good insurance coverage know how hard it can be to figure out how much they owe after a visit to the doctor or, even worse, the emergency room, which can generate multiple bills. But as patients become responsible for a growing share of costs — not just co-payments, but also deductibles and coinsurance — bill paying is becoming ever more complex.

On top of that, more medical providers are using collection services and turning to them more quickly than they have in the past, some experts say.

“It used to be that the mantra was ‘gentlemen and physicians rarely discuss matters of money,’ ” said Dr. Jeffrey Hausfeld, an otolaryngologist and plastic surgeon who now co-owns FMS Financial Solutions, a collection agency that specializes in medical debts. “But that has changed now.”

The reason is that the portion of the bill that patients owe has become a larger percentage of medical practices’ and hospitals’ revenue, said Mark Rieger, chief executive of National Healthcare Exchange Services, which offers software to help providers manage billing. “They are getting increases in their fee schedule amounts, but their revenue is declining because more of the responsibility is being shifted to patients,” he said.

Medical providers collected no more than 8 percent of their revenue from patients about 10 years ago, he said. Now, it is closer to 20 percent, or even 30 percent, in some markets.

Like Mr. White, people who fail to pay or respond to a medical collection agency in time — whether intentionally or not — may be surprised to learn, often much later, that it left a black mark on their credit record.

FICO, which produces one of the most popular credit scores used by lenders, said it viewed different types of collection agency accounts — medical-related or otherwise — as equally damaging. For someone with a spotless credit history, “it wouldn’t surprise me if their score dropped by 100 points or more,” said Frederic Huynh, a principal analytic scientist at FICO. And the blemish does not entirely disappear for seven years.

Consumer advocates argue that this is unfair. After all, medical debt is usually something people do not volunteer for, and billing errors and figuring out who owes what can often take months. According to the American Medical Association’s 2011 National Health Insurer Report Card, commercial health insurers processed 19.3 percent of claims erroneously in 2011, up from 17.3 percent in 2010.

In 2010, an estimated 9.2 million people aged 19 to 64 were contacted by a collection agency because of a billing mistake, according to research by the Commonwealth Fund, a nonprofit research group, while 30 million were contacted by a collection agency because of an unpaid medical bill.

“There is enormous room for errors, whether they are intentional or unintentional,” said Pat Palmer, founder of Medical Billing Advocates of America.

Rodney Anderson, a mortgage banker in Plano, Tex., said he started to notice in 2008 that more of his customers were being hurt by these medical delinquencies. So he kept notes on 5,100 loan applicants over 10 months. He found that 2,200 had at least one medical debt that lowered their credit score, and many of them were unaware of the damage.

“It’s the same thing over and over,” said Mr. Anderson, executive director of Supreme Lending. “You just don’t let $100 go to collections to ruin your credit.”

That prompted him to take the issue to Congress. He said he had spent $1.5 million of his own money on consultants and on lobbying to change the rules. And his efforts, along with those of consumer groups and others, have gotten lawmakers’ attention.

A version of the Medical Debt Responsibility Act, which would erase medical debts from credit reports within 45 days of being settled or paid, was approved by the House with bipartisan support in 2010. The bill was reintroduced in the Senate by Jeff Merkley, Democrat of Oregon, in March.

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Is That Credit Score a FICO, or a FICO 8?

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It’s difficult enough already to grasp the nuances of consumer credit scoring. So it doesn’t help when industry players are fuzzy about just which score they’re talking about.

Last week, I wrote about a report from FICO, creator of the most widely used credit score. The report, which analyzed data from the credit reporting bureau Equifax, showed an increase in the proportion of people in the top tier of credit scores, and a decrease in the lowest tier. (FICO scores run from 300 to 850; the higher the score, the better your credit. Your actual number may vary, depending on which of the credit reporting bureaus — like Equifax or TransUnion — provides the credit information for calculation by FICO’s formula.)

What FICO failed to note was that the analysis was not based on the version of the FICO score that most lenders still use to rank a potential borrower’s creditworthiness. Rather, the FICO analysis used the newest version of the score, called FICO 8. (Thanks to an alert reader for bringing that to my attention.)

When I followed up with FICO, Rachel Bell of FICO Labs, the company’s research arm, said it did not matter that the report used FICO 8. Individual credit scores might differ under the latest formula, she said, but the trend would be the same, even if an older scoring model were used. Fair enough.

But I would argue that for the sake of clarity, the company should have specified the version of the score on which it based the report, because there is so much confusion among consumers about credit scores, and also because consumers generally do not have access yet to their FICO 8 scores.

Some background: According to FICO’s consumer Web site, FICO 8 was introduced in 2009, and is based on a formula that has been revised to better predict borrower risk. For instance, FICO 8 scores are “more forgiving” of rare late payments, and give more weight to highly used credit cards — those with balances near their limits. “The goal and the methodology for FICO 8 is doing a better job of identifying risk,” Ms. Bell said.

Nearly half of consumers, the Web site says, have FICO 8 scores within 20 points of their scores under the previous version. Ms. Bell said that because the updated formula is more sensitive to predicting credit risk, people with good credit habits would probably see their scores go up a bit with FICO 8, while people who are riskier might see theirs go down.

FICO says more than 7,600 creditors are now using FICO 8. Lenders that have adopted it include Citi Cards, the credit card unit of Citibank, according to FICO. “Our approach is to get lenders using the most current version available as soon as possible,” Ms. Bell said. But that typically takes time.

The company would not disclose the number or proportion of lenders using older FICO scoring models. In an e-mailed statement, a company spokesman, Craig Watts, said FICO 8 “is the fifth generation of our classic FICO scoring model, first introduced in 1989.” He said that lenders’ adoption of FICO 8 has been faster than their adoption of scores from any of the preceding scoring models.  “We’ve found over the years that some lenders convert quickly, some lenders never choose to leave their current scoring version for a newer updated one and most lenders fall somewhere in between,” the e-mail said.

Still, FICO 8 isn’t yet the most widely used version. That is why, currently, consumers cannot buy access to their FICO 8 scores on the company’s consumer site, myfico.com.  Ms. Bell said myfico.com was intended to offer consumers access to the scores that are most used — so until FICO 8 is more broadly adopted, the scores available for purchase by the public are based on the older formula.

“We’re getting close to that switch,” Ms. Bell said. “There will be a point where we use FICO 8.”

Have you checked your FICO score lately? How do you think your FICO 8 score would compare, and would you like to have access to your FICO 8 score now?

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