But the old bill, which she ultimately paid, had gone to collections and showed up as black mark on her otherwise clean credit report. Ms. Barringer said she found out about it only when she applied for a mortgage last month and got an interest rate that was half a percentage point more than it would otherwise have been. As a result, she is paying an extra $94 a month on the $298,000 loan she took out on a three-bedroom ranch in Dallas, adding up to tens of thousands of dollars over the life of her 30-year fixed-rate mortgage.
And it was all because the doctor didn’t contact Ms. Barringer, an elementary school assistant principal, in a timely manner to let her know that she had mistakenly handed over her dental insurance card.
“I have always paid my bills on time and I put myself through school and have not had any kind of credit issues,” said Ms. Barringer, a single mother of twin 8-year-old boys. “If they want to punish somebody, does it really need to be on your report for seven years if you have not had credit problems and you pay it off? It just seems a little much.”
Credit scores try to capture your financial behavior and distill that identity into one all-powerful number. But that figure doesn’t differentiate between people like Ms. Barringer, whose credit suffered for an innocuous reason, and consumers who can’t keep up with their credit card payments after a wild shopping spree at Best Buy.
But now, at least one major credit score generator, VantageScore Solutions, has decided to ignore collection actions on credit reports — more than half of which are typically tied to medical debts — as long as the collections are paid. The change is not being made out of sympathy for people like Ms. Barringer. Instead, the company found that paid collections are less accurate at predicting future defaults than looking at unpaid collections in combination with a variety of other factors, like the age of consumers’ accounts and the size of their loans.
“There was no intentional decision to exclude a piece of behavior,” said Sarah Davies, senior vice president of analytics, research and product management at VantageScore Solutions, a joint venture of the three major credit reporting companies. “It was just about what was most predictive.”
VantageScore’s findings would also seem to lend support, at least indirectly, to proposed legislation that was reintroduced in Congress this year to require consumer reporting agencies to remove fully paid or settled medical debt information from consumers’ credit reports within 45 days of the debt’s resolution.
That sort of fix would could potentially help some of the estimated seven million people who reported that a billing error prompted a collection agency to contact them in 2012, according to an April study by the Commonwealth Fund, a private foundation that researches health policy issues.
“While it doesn’t seem like an isolated collection account should have a significant impact on your scores, it can,” said Gerri Detweiler, a credit expert with Credit.com who supports the legislation. “We’ve heard from so many people over the years who thought that paying a collection account would help their credit scores. They were shocked to learn it didn’t. It feels terribly unfair to consumers not to feel like they are getting credit for doing the right thing.”
The VantageScore plays second fiddle to the FICO credit score, which is more widely used by lenders and continues to consider all collections valued at more than $100. So it’s unclear how many consumers the formula change will help. And ignoring paid collections does little for the millions of people who cannot afford to pay their medical debts because they are underinsured, uninsured or simply can’t keep up with the growing amounts their health insurance policies require them to pay. Among people who reported having trouble paying their medical bills, 32 million, or 42 percent, said they received a lower credit rating as a result of unpaid medical bills, Commonwealth found. And an estimated 28 million, or 37 percent, said they used all of their savings because of their bills, whereas 20 million, or 27 percent, took on credit card debt.
Even someone with a spotless credit history can fall into a downward spiral with just one hospital stay. “It is easy to point to someone who has run up their debt when it has to do with consumer spending,” said Mark Rukavina, former executive director of the Access Project and now a principal at Community Health Advisors, a Boston-based firm that consults with nonprofit hospitals. “But it is harder to say that about somebody that is dealing with illness and injury.”
The Consumer Financial Protection Bureau, which oversees both the major credit reporting agencies and debt collectors, has acknowledged that medical debts are a problem. Richard Cordray, the agency’s director, has said that consumers who have medical collections reported on their credit file can face a harder time getting a loan — or even a job, since some employers now look at prospects’ credit reports. And the agency has gone so far as buying its own batch of anonymous credit reports so that it can study how medical debts affect consumers, as well as to better understand the degree to which paid medical collection items predict defaults. But it remains to be seen what sort of action, if any, it will take.
The big question is whether FICO’s scoring strategy will eventually ignore paid collections, too, since that would have a much broader effect. A spokesman said that its scoring technique did not distinguish between paid and unpaid collections, though it began ignoring all collections for amounts under $100 when it introduced the latest iteration of its score in January 2009. All other types of reported collections are considered “as a derogatory because as a category they have proven to be strong indicators of credit risk,” the company said in a statement. “To ignore data that has been proven to be highly predictive of a person’s ability to repay a debt would not be in the best interest of consumers or lenders.”