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Monday, September 19th, 2011

Changes on the Way for Credit Scores?

Though the Fair Isaac Corporation (FICO) introduced a new credit-scoring model more than three years ago, lending institutions are only now beginning to adopt it. According to a new report on Credit.com, the delay could be bad news for consumers hoping to apply for credit or loans.

The new model, called FICO 8, was ready for adoption in 2008 and rolled out in 2009. But, aside from Citibank, which adopted the new scoring method earlier this summer, the major lenders in the U.S. (including Bank of America, Wells Fargo, Chase, Fannie Mae and Freddie Mac) have yet to change their scoring techniques.

FICO Background

The FICO credit score is generally heralded as the gold standard in the lending industry. This score ranges from 300 to 850 and determines what kind of rates consumers get on loans (and whether they qualify for loans at all).

Negative credit actions (including defaulting on loans, filing for bankruptcy, going into foreclosure, etc.) lower a credit score; positive credit actions (paying bills on time, having a low credit usage ratio, etc.) raise it.

Is the Delay Hurting Borrowers?

Sources note that FICO 8 introduces scoring tools that could give consumers a better chance of qualifying for loans, including:

  • Less emphasis on unpaid debts under $100. Many of those debts, it seems, might be from the doctor. According to the Commonwealth Fund, 14 million Americans are currently fighting medical bills. And the FTC notes that half of all debts in collections are medical.
  • More consumer categories. Rather than dividing consumers into 10 groups, FICO 8 carves out 16, meaning that scoring tools will be able to more accurately predict consumer behavior.
  • Fairer comparisons. The old credit-scoring model (still currently in use in much of the country) essentially had one ruler for every lender. The new model allows lenders to compare someone with, say, a short credit history to others with histories of a similar length. This will help provide a more accurate picture of whether or not someone is a good credit risk compared to her peers.
  • Credit utilization will count more. To balance the effect of counting small unpaid debts less, high credit utilization ratios will hurt a score more significantly (i.e. those with maxed out on cards will suffer).

Possible Reasons for Delay

According to Credit.com, the delay in adoption of FICO 8 might be related to a number of factors. Fannie and Freddie (responsible for underwriting most mortgages in the U.S.), for example, are currently facing opposition in Congress to the government support they enjoy. After suffering major losses in the mortgage meltdown, they may be more focused on staying afloat than changing the way they do business.

As for other major lenders, the outlook isn’t much better. Seventeen major banks are now facing lawsuits regarding toxic assets they sold to investors during the mortgage boom. Depending how the suits play out, those institutions could owe serious money that they may or may not have. Considering those conditions, a non-essential policy change may seem frivolous.

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Posted in Your Credit Score | No Comments »

Monday, May 9th, 2011

Study: More Drug Manufacturers Cutting Deals to Keep Prices High

The Federal Trade Commission announced this week that according to a recent study, there has been an increase in the number of drug companies engaging in pay-to-delay deals with generic drug producers.

The FTC has denounced the actions, and with good reason: medical costs are one major contributor to many personal bankruptcy filings of U.S. citizens. So how might these types of deals affect you and your family?

  • Background information: Once a drug company patents a certain drug, generic producers of drugs of similar chemical composition may file a challenge to the patent, with the goal of being able to produce a chemically similar (or identical) version to sell more cheaply.
  • How the deals work: If these challenges went to court, it’s possible that they would result in judges ruling in favor of the generic producers. In order to avoid that outcome (and thus secure the market for themselves for a longer period of time), some brand-name drug manufacturers settle out of court with generic drug producers.
  • Who makes money: Most settlements include an agreement that the generic manufacturer will not produce the generic version of the drug until a certain date; some settlements include a financial incentive from the brand-name manufacturer to lengthen the delay period (i.e. the brand-name manufacturer pays the generic manufacturer to delay its release of its cheaper product). The FTC found that in cases involving a payment, generic drug release waiting periods increased by an average of 17 months.
  • Who loses money: The FTC notes that in 2010, 22 name-brand drugs were targeted in pay-to-delay deals. The total number of such deals reportedly jumped from 19 in 2009 to 31 in 2010 (an increase of more than 60 percent).
  • What it costs us: The total dollar toll these deals have taken on Americans comes to $3.5 billion per year, according to FTC estimates. The difference comes from the fact that generic drugs can cost anywhere from 20 to 90 percent less than their name-brand counterparts. That’s a lot of money people could be putting toward paying down mortgages or credit card debt.

Are Generic Drug-Delay Deals Legal?

Anyone familiar with antitrust laws may wonder whether deals to delay competitive drugs are even legal in the U.S. The answer is a little murky. It seems that the FTC has filed a number of lawsuits against pay-to-delay agreements and has demonstrated its support of bills in Congress designed to eliminate such activity among drug manufacturers.

How can you take action? While there may not be much you can do about the problem of pay-for-delay agreements, if you’re worried about paying your medical bills, you can (and should) ask your physician whether generic versions are available any time you need medicine.

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Posted in Finance 101: Secure Your Future, The Law and Your Money | 1 Comment »

Monday, August 9th, 2010

Save on Medical Bills (and Other Pesky Expenses)

Considering that a significant number of Americans who seek bankruptcy protection do so at least in part because of overwhelming medical bills, there's a little-known trick that could prove financially amazing for some individuals. A recent article from the New York Times suggests a very simple technique for saving money on doctor’s bills.

The Trick

Luckily, this “trick” for knocking as much as 25 percent off your medical bills isn’t complicated or difficult. Here’s what you have to do:

  • Call the hospital or doctor you visited when you have a copy of your bill.
  • Ask if you can have a 25 percent discount if you agree to pay in full over the phone (which usually means giving a credit or debit card number).
  • Wait for results.

The caveat here is that you actually have to have 75 percent of the bill available in cash; otherwise, the strategy won’t work. But, if you’ve developed a savings account for emergencies or even for routine medical costs, you’re probably in a good position to give this a whirl.

Why It Works

So why would hospitals and doctors agree to accept less than the amount they charged you, often without any sort of negotiation? Because, according to sources, many are accustomed to patients who cannot pay, refuse to pay, have their debts discharged in bankruptcy or otherwise avoid payment in full.

After all, medical debts are dischargeable in bankruptcy and emergency procedures can cost a pretty penny, especially if you’re not insured or insured well.

Where Else You Can (And Can’t) Try It

The good news (if you’re willing to start saving some money to try this trick elsewhere) is that the medical world isn’t the only one that might accept an offer for immediate, partial payment.

Consider trying it for one of your credit cards: if you have a significant balance on one card but have saved up a portion of what you owe, try calling your company and asking to make a lump payment for that portion, in exchange for their excusing the rest.

It’s a good idea to get such an agreement in writing, so if your issuer consents, be sure to include your agreement in writing when you send payment. Like medical bills, credit card debt can be discharged in bankruptcy, and many issuers will be happy to accept a guaranteed portion rather than risk losing all of it if you file.

The trick probably won’t work, though, for student loans. Because these are not usually dischargeable in bankruptcy court, student lenders have little incentive to settle for less than what you owe.

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Posted in Your Credit Score | No Comments »

Thursday, June 4th, 2009

Medical Bills and Bankruptcy

The LA Times reports today on a Harvard study that shows medical bills played a role in 62 percent of all bankruptcies filed in 2007, a seven percent increase compared with 2001.

What's more, many of the people filing bankruptcy due to overwhelming medical bills had health insurance. From the LAT:

Medical insurance isn't much help, either. About 78% of bankruptcy filers burdened by healthcare expenses were insured, according to the survey, to be published in the August issue of the American Journal of Medicine.

"Health insurance is not a guarantee that illness won't bankrupt you," said Steffie Woolhandler, one of the authors, a practicing physician and an associate medical professor at Harvard.

It's not just high medical bills that contribute to bankruptcy, but also the lost wages and work time that an injury or illness can cause.

There is sometimes a stigma assocaited with filing bankruptcy, the idea that bankruptcy filers are irresponsible with their money. But this study shows:

Most people who filed medical-related bankruptcies "were solidly middle class before financial disaster hit," the study says. Two-thirds were homeowners, and most had gone to college.

Even if you plan for the unexpected, a sudden injury or illness can hit hard. Lost work time can cause your income to dry up, while extremely high medical bills turn a small, manageable amount of debt into an out-of-control giant.

Filing Bankruptcy and Medical Bills

For bankruptcy purposes, medical bills are considered unsecured debt.

This type of debt may be entirely discharged in a Chapter 7 bankruptcy filing.

In a Chapter 13 filing, your medical bills could be ordered and combined with other debts, and possibly reduced, in a bankruptcy trust.

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Posted in The Truth about Bankruptcy | No Comments »

Saturday, February 10th, 2007

PBS Interviews Harvard Professor Elizabeth Warren re Debt in America

PBS NOW broadcast an interview with Harvard Law Professor Elizabeth Warren this week.  Professor Warren described her recent study as one of those situations where she and her colleagues were "knocked over by our own research".

Warren reports that half of all bankruptcy filings occur because of serious medical debt.

You can listen to the broadcast at http://www-tc.pbs.org/now/rss/media/news-306.mp3

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Posted in Economic News: How Are We Doing? | 1 Comment »

Wednesday, January 17th, 2007

New Study Ties Credit Card Debt to Medical Bills

Recent studies of bankruptcy petitioners have shown that medical expenses and associated lost income were a major factor in their financial problems, and consumer credit information from the federal government has confirmed that medical expenses are a primary reason for consumer borrowing, so it should come as no surprise that those without medical insurance and those who have faced major medical expenses over the past few years tend to have higher credit card debt.

A study just released by Demos reveals some interesting numbers:

  • Low and middle income households with a major medical expense in the past three years carry an average of 45.9 percent more credit card debt than similarly situated households without a recent major medical expense.
  • The average credit card debt for families without medical insurance is 32.2% higher than that of families with medical insurance.

Although the evidence has been clear from the beginning that the vast majority of bankruptcy filings were triggered by unforeseen trauma like job loss, serious illness, uninsured medical expenses, divorce, and death in the family, this connection between medical bills and consumer debt puts a new perspective on even those bankruptcy petitioners who list primarily credit card debt.  Credit card debt incurred to pay medical expenses hardly correlates with the picture of the "deadbeat" bankruptcy petitioner "running up" credit card bills irresponsibly and then shirking his responsibility.

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Posted in Economic News: How Are We Doing? | No Comments »