Accidents happen. Medical bills also happen shortly thereafter. Unexpected medical debt is the number one reason Americans file bankruptcy and, in some cases, it happens without the consumer's awareness. Unpaid bills affect credit scoring. Credit scoring affects the ability to obtain housing, transportation and sometimes, employment. It's a vicious cycle that many would like to escape. Recent changes in medical debt reporting may help.
Advocating for yourself with healthcare providers will also help keep medical debt from affecting your credit.
How Medical Debt happens
If you've ever had to visit an emergency room, you may be familiar with the slew of bills arriving from different hospital departments. The ambulance ride is one bill, the x-ray is another, and any medications administered during your time in the ER are billed separately as well. Many patients will assume that they've paid all pending medical bills or that they will be covered by health insurance until they are denied credit. A simple car loan, credit card application or even employment could be denied due to an outstanding debt reported on a credit report. In some cases, a patient doesn't even realize they have been sent to collections until this happens. Medical debt can happen due to a few unexpected circumstances:
- Some bills may be sent to collections even before the patient receives a bill. Healthcare providers may negotiate with insurance companies for months before a bill is sent to the patient.
- A medical debt can be sent to collections even if the patient is currently paying on the debt.
- Some creditors still use older credit scoring models that do not use the current medical debt reporting changes.
Changes in Medical Debt Reporting
In a 2014 report from the Consumer Financial Protection Bureau, Americans received some acknowledgment of how medical debt affected their creditworthiness. Most medical debt is unexpected and not within the control of the consumer and the CFPB agreed that Americans shouldn't be punished for it while paying other bills on time.
Fall 2014 brought about changes in FICO credit scoring of medical debt with a new analytics protocol called FICO 9. With FICO 9, less weight was applied to medical debt and medical debts that were in collections but were settled or paid off will be dropped from credit scoring. VantageScore credit scoring made changes in 2013 with regards to medical debts or any debts that were paid in full. If a credit bureau uses VantageScore 3.0 for credit scoring, delinquent accounts that were in collections but paid off or settled would not be included in credit scoring.
In early 2015, the three major credit reporting bureaus announced significant changes in how they would report medical debt on credit reports. TransUnion, Experian and Equifax all agreed to a 180 day waiting period before reporting unpaid medical debts. This 6 months of extra time allows hospitals and physicians to receive insurance payments and also clear up any identity or credit mishaps that would hold up payments.
While these changes gradually infiltrate the systems used by creditors, consumers are still struggling to find ways to avoid medical debt and the rising costs of healthcare.
Avoiding Medical Debt, Repairing Credit
In 2014, NerdWallet estimated that 56 million Americans would struggle with paying medical bills and over half of that population would not take their required medications due to cost. Patients began avoiding preventative care and relying on emergency care, which caused higher medical bills. The New York Times now reports that Obamacare seems to be reducing medical debt for low income households. Either way, Americans want a way to avoid or get out of medical debt and repair their credit. Here are some tips to avoid or repay medical debt:
- Communicate with your healthcare provider - If you are uninsured, let your doctor know. In some cases you can negotiate a good rate for your healthcare visits.
- Look at your bill - You have a right to see an itemized copy of your medical costs to ensure accuracy.
- Set up a payment plan - Healthcare providers would like to be paid over time rather than not at all. Negotiate a payment plan that works for you.
- Avoid using a credit card - Credit card debt is weighted more than medical debt on your credit scoring.
If your credit is already being affected by medical debt, here are some tips for paying it off and repairing your credit:
- Review your credit report regularly - Some consumers don't realize their credit has been affected by medical collections until being denied credit.
- Communicate with collections - A collections agency should allow you to verify the original creditor and validate how much you actually owe. These communications will allow you to effectively assess what you owe and dispute any false charges.
- Negotiate - Your next steps may be to offer what you can pay or setting up a payment plan. Ask the collections agency if they can remove it from your credit report or not report it all if you can settle the bill quickly.
- Settle or Pay it off - Medical debt collections are removed or do not affect credit scoring after being settled or paid off (thanks to FICO 9 & VantageScore 3.0) but negative marks such as late payments before collections may still remain. Be aware that these negative marks may affect your credit score for up to seven years.
Be an Advocate
American consumers are not powerless when it comes to medical debt and their credit. Although it is true that not all creditors are using the most recent versions, a patient can still advocate for themselves if medical debt appears to affect their ability to obtain credit. Education, communication and negotiation are strong tactics to use both before a medical emergency and after. Unfortunately, medical debt can end up on your credit report without your knowledge. Use these tools to make sure your credit is not affected.