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Medical debt and credit scores

July 6th, 2022 9:44 AM by Sam Kader

Starting July 1st, 2022,  the three major credit bureaus will have significant changes on how medical debt will affect credit scores.  

  1. Paid medical collections will no longer be reported on consumer 3 major credit reports - Equifax, Experian and TransUnion effective 7/1/2022. Previously, medical collections could have remained for up to seven years.
  2. Consumers will have more time to work with insurance and healthcare providers to address their medical debt before it's reported. New third-party medical collections will be added to credit reports only after one year has passed. Currently, it is reported after six months.  Any unpaid medical collections will not appear on credit reports unless they’ve been in collections for at least a year (up from six months currently). 
  3. Starting in early 2023, Equifax, Experian and TransUnion will also no longer report third-party medical collection debt under $500. 

Medical debt effects

The Consumer Financial Protection Bureau says that 43 million Americans have about $88 billion worth of medical debts on their credit reports. The agency adds that medical debt accounts for 58% of bills in collections.

Many people with otherwise sparkling credit records are dragged down by medical debt. Having a debt in collections could easily trim 100 points off a strong credit score. In many ways, it’s hard to call medical debt a real debt because few people choose to take on medical debt, and typically, patients have no idea how much they will be charged for a service or a procedure. There’s no upfront disclosure or interest rate to compare. Individuals and families must confront a billing and hospital collections system that can be best described as error-plagued, confusing and labyrinthine.

Debt not erased

Medical debts are being treated differently by the credit bureaus, but you’re still responsible for paying debt off (assuming the debt’s statute of limitations has not expired). Here are a few options: 

Option 1 –  Call the Hospital/Medical Account Receivable (number shown on statement) and try to negotiate a payment plan. Many offer low- or zero-interest financing plans. Nonprofit hospitals are required by law to offer financial assistance or charity care to patients, and more than half of U.S. hospitals qualify as nonprofits. It’s worth a try — the worst they can do is say no.

Option 2 - A personal loan could be a suitable backup plan since those interest rates can be as low as 5% if you have good credit.

Option 3 - Nonprofit credit counseling is another option worth considering. One of the nation’s largest nonprofit credit counseling agencies, Money Management International, offers debt management plans with similar interest rates. An advantage is that you don’t need a top-notch credit score to qualify.

Financing your medical bills with a credit card is probably not a good idea, since the average credit card APR is 16.35%.

FICO® Score Impacts

The percent of people with FICO® Scores that have a paid medical collection reported is relatively low at ~2%, and approximately 10% of people with FICO Scores have a reported medical collection less than $500. The most recent FICO® Score versions already have logic in place that bypasses all third-party collections (including medical) that are paid in full or those with an original amount under $100, and place less weight on unpaid medical debt relative to other unpaid bills. FICO Score 8 bypasses all third-party collections with an original amount under $100.

The potential impact on a person's FICO® Scores associated with these changes will depend on both the amount of collection information removed as a result of these changes, as well as the other information contained in the person's credit file:

  • If the consumer has other negative items reported in their credit file, the recency, frequency, and severity of those negative items will continue to be assessed by the score. Therefore, the removal of paid third-party medical collections and/or third-party medical collections <$500 may have a more modest impact on the score.

  • If the third-party medical collection is the only negative item reported, its removal could have a more substantial positive impact on score.

     

What else you should know

The credit bureaus’ new ways of reporting medical debt are reminiscent of some other relatively recent changes in the credit reporting industry. Within the past few years, the bureaus removed almost all public records from credit reports. Examples include tax liens and collections resulting from library fines and traffic tickets. Like medical debts, these are often one-off scenarios that don’t follow the same pattern as monthly loan payments. 

In other words, your credit score is meant to be a numerical representation of how likely you are to repay a lender. Paying your monthly credit card, car loan or mortgage bill on time feels like a much better apples-to-apples comparison than repaying a medical bill that may have been an isolated incident involving a life-or-death situation (and possibly an insurance mix-up as well).

Furthering this idea, lenders and credit bureaus have started to add other financial obligations to some consumers’ credit reports. Experian Boost is one such program that can incorporate utility, telecom and streaming accounts. Buy now, pay later plans are also being added to credit reports. The credit bureaus seem to believe these payment behaviors are more predictive of credit risk than medical debts and traffic tickets.

Bottom line

The new ways of assessing medical debt should lift tens of millions of Americans’ credit scores. It’s always a good idea to check your credit reports regularly to make sure everything is accurate. Especially if you have one of the types of medical debt that should disappear on July 1st, make a note to check your credit reports on or shortly after that date.

A good, free resource is AnnualCreditReport.com. It’s providing free weekly reports from all three major bureaus through the end of the year. If anything looks incorrect, file a dispute with each bureau that’s reporting the errant information. Your credit score is one of the most important numbers in your financial life, so it’s important to protect it. Here are more information on how you can increase  your credit score


Posted in:Credit Score, FICO and tagged: Credit ScoreFICO
Posted by Sam Kader on July 6th, 2022 9:44 AM

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