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Money Talk

Personal finance Q&A: How medical collections affect credit scores

Money Talk

Dear Liz: I am trying to help my daughter deal with enormous student loans.

She is a doctor and very busy and simply cannot deal with the stress of almost $350,000 of education debt. I want to help her refinance, but to get the best rate I would like to help her improve her credit score (even if it is already 712).

She had three small debts turned over to a collection agency after a visit to an emergency room a couple of years ago. We plan to pay them off. Do I have to ask the collection agency to erase them or contact the original creditor?

Answer: You mention that your daughter has a 712 score, but she actually has many credit scores that change all the time. Small medical collections can have an outsize impact on those scores — or they can have no effect at all. It depends on what credit scoring formula the lender happens to use.

The latest version of the leading credit score, FICO 9, ignores paid collections and treats unpaid medical debt less harshly than other types of collection accounts. The most commonly used version, though, is FICO 8, which ignores only those collections under $100 and doesn't differentiate medical from other collections.

Some lenders still use older versions of the formula that punish people for even small collections.

FICO also has a rival, the VantageScore. The latest and most-used version of that formula, VantageScore 3.0, also ignores paid collections.

You can contact the lenders you may use to refinance the debt to find out which scores they use, and which versions. That could help you decide how hard to push to get these collections erased.

If paid collections aren't counted, you can just pay them off and be done with it. (You'll of course want to keep the paperwork showing the debts have been paid and have your daughter check her credit reports to make sure the accounts reflect a zero balance.)

If the accounts could hurt her even if they're paid, you have a couple of options.

One is to ask the hospital to take back the accounts, since medical bills are often placed with collection agencies on consignment rather than being sold to them outright. Then you can pay the hospital, and the collections should disappear. (Although, again, your daughter will need to follow up to make sure.)

Another option is to try to negotiate a "pay for deletion" — which means the collection agency promises to stop reporting the account in return for payment. You'll want this agreement, if you can win it, to be in advance and in writing.

Dear Liz: Regarding the reader whose tax payment never made it to the IRS: I agree that electronic payments are the best and safest, but you might want to emphasize that the payments should be done directly through the IRS website.

I made the mistake of scheduling a couple of payments through my online banking, and a month later I received a notification from the IRS that I was in arrears, although the bank statement indicated that the payment has been debited.

It took several months of correspondence before the IRS acknowledged that the money was received. Luckily, the penalties and interest were only about $20, so I didn't have to go through the additional hassle and filling out forms to reclaim it. The IRS website is very easy to use, and I haven't experienced any problems since.

Answer: The IRS' Electronic Tax Payment System, which was designed primarily for businesses, has been around for nearly two decades, but the agency only recently added a "Direct Pay" option expressly for individuals to make estimated tax payments and pay bills.

These methods and others, including electronic funds withdrawal when you e-file your return, are explained at http://www.irs.gov/payments.

Dear Liz: I'm often required to make estimated quarterly payments and was always concerned I would miss one of them.

A few years ago, I came across the Electronic Federal Tax Payment System (EFTPS) that is offered by the U.S. Treasury. The beauty of the system is that once it is set up, there is nothing more for me to do. I set up all the payments I need to make and the system takes care of it.

I just have to set it up each year at the time I file my tax return. I have been using the system for several years and have had no issues whatsoever with it.

Answer: Thanks for sharing your experience with EFTPS. While that system allows you to schedule payments up to 365 days in advance, the Direct Pay option for individuals allows scheduling only up to 30 days in advance.

Questions may be sent to Liz Weston, 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the "Contact" form at asklizweston.com. Distributed by No More Red Inc.

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