Is All Debt Created Equal?
In May of this year New York’s A.G. Schneiderman reached a settlement with the three major national credit reporting agencies. While I am somewhat skeptical of the attention regulators are paying to the credit bureaus lately – implying that consumers are victimized by inaccurate reports as opposed to their own poor credit decisions – a recent blog post from Fico analyzing the impact of medical debt on credit scores, strengthens at least part of the AG’s case.
Fico’s research suggests that persons with previously unpaid medical debts are better credit risks than members with other kinds of unpaid bills. Specifically, Fico found that when the only “derogatory” information in a person’s credit file was a third party debt collection of a medical debt that was paid off, disregarding this information created a slightly more predictive credit score than integrating this information in the credit score.
In addition to the usual stuff, the AG’s settlement stipulates that Credit Reporting Agencies will now wait 180 days before a medical debt is reported on a credit report. Remember that your credit union is a credit “data furnisher,” so it isn’t directly impacted by this settlement. Nevertheless, the settlement suggests that medical debt collection efforts are receiving enhanced regulatory scrutiny. Fico’s research suggests the need for a more nuanced approach to these debts.
As an outsider to the credit union industry, one of the best ways for me to learn has been to talk and listen to industry veterans. I love talking to the person in charge of collecting delinquent loans in particular. At their best, they combine the empathy of Mother Teresa with the tenacity of a pit bull. They know intuitively what Big Data can confirm quantifiably: not all debt is created equal. I bet Fico’s research confirms what your debt collector already knew intuitively: financially responsible people get sick and medical bills pile up but a single illness doesn’t make someone a credit risk for the rest of their life.