The mark of unpaid bills on a credit score can take years to erase.
Chad Gentry is co-founder and executive director of Denver-based mpowered, a non-profit focused on financial education. He’s counseled hundreds of Colorado families on how to tackle debt.
“The credit score is huge.” Gentry says. “It reaches into all parts of our lives that people don’t even think about: getting a job, getting a loan.”
For some consumers, especially those with unpaid medical debt, those credit scores could be about to get a raise.
Credit scoring giant FICO, the company behind the credit scores used by most banks and lenders, has come up with a new formula. The new scoring system would place less importance on medical debts. It would also ignore old debts that have been paid off. And lenders could start using the new model as early as 2015.
The new credit scoring probably won’t provide much more than a small boost on some credit scores. People struggling with medical debt but with relatively good credit and a clean credit history could see their scores rise. While the raises may not make or break a loan offer, they could help borrowers get better interest rates on loans and mortgages.
“Banks want people to have good credit scores that effect their true ability to pay,” Gentry says.
Anna Newell Jones amassed over $23,000 dollars in personal debt in student loans and unpaid credit card bills. In 2011, she decided it was time to make a change and she embarked on a personal “spending fast.”
“I gave up eating out, I gave up new clothes, I gave up music, trips, and events out with friends,” Jones explains. “If it wasn’t needed to survive, I said no.”
In just over a year, Jones had erased all of her personal debts. She chronicled her experiences on her blog, www.andthenwesaved.com, where she now helps others control their overspending. Jones says she didn’t even know what her FICO credit score was until very recently.
“It’s a lot easier to ignore it than face it. If you know how deep in debt you are, you have to do something about it.”
Jones calls herself a “natural spender” and says it was hard to give up spending on things she didn’t need. In a moment of weakness during the yearlong fast, she purchased a $200 pair of designer sunglasses (which she later returned).
But once she got used to “living without” Jones says the experience of tackling her debt head-on was liberating:
“I don’t need to win the lottery. I don’t need a new job. I don’t need an external source to save me.”
Click on the audio link above to listen to Anna Newell Jones and Chad Gentry’s conversation with Ryan Werner about the changes to credit scoring that could be coming early next year, and as they discuss tips on how to tackle personal debt.
