Navigating the labyrinth of medical bills can be daunting, and the impact on your credit score is real. I’ve delved into the intricacies of how medical debt affects your credit, exploring protections and proactive steps. Let’s unravel this vital aspect of personal finance together.
Special Consumer Protections for Medical Bills
Healthcare in the United States is uniquely expensive, even for those with comprehensive health insurance coverage. Medical bills can pile up quickly, debt can spiral out of control, and before you know it, your good credit score is being threatened by aggressive debt collectors.
It’s not a great system, but that’s how it works in the U.S. Indeed, Consumer Finance recognizes that “Nearly 1-in-5 households in the United States has reported having some form of overdue medical debt. Patients and their families are contacted by debt collectors about medical bills more than any other type of debt, and it commonly results in negative information appearing on credit records. In fact, in 2021, 43 million people had allegedly unpaid medical bills on their credit reports.”
This, in turn, can have a direct and negative impact on the credit scores, borrowing power, and credit eligibility for countless Americans. So obviously, medical debt is a serious credit issue for many consumers.
According to Equifax, there are several special exceptions when it comes to reporting outstanding medical bills to the consumer credit reporting companies. Most credit scoring models recognize that healthcare expenses fall into a special category.
These bills can come on unexpectedly, can be quite large in size, and can mount quickly for consumers facing chronic conditions or acute health crises. In other words, sustaining sudden, heavy, and growing medical debt is not necessarily an indication of irresponsible credit usage. Consequently, these debts are not treated as evidence that you may not be a responsible borrower…at least not at first.
With that in mind, let’s take a closer look at some of the special protections that exist for medical bills.
First and foremost, very few if any medical providers will report late payments, missed payments or outstanding debt to the credit bureaus. According to Equifax, “Most healthcare providers do not report to the three nationwide credit bureaus (Equifax, Experian and TransUnion), which means most medical debt billed directly by physicians, hospitals or other healthcare providers is not typically included on credit reports and does not generally factor into credit scores.”
Insurance companies may treat your debts differently. But when it comes to your healthcare providers, most prefer to work directly with patients to try to satisfy outstanding medical bills before they can become a threat to your credit scores. It’s only after your medical bills have been sent to debt collectors that they can become a threat to your credit score.
Still, there are several additional layers of protection in place for consumers with heavy medical debts. Equifax notes that medical bills are treated differently by U.S. consumer credit reporting companies than other debts in three key ways:
As of July 1st, 2022, paid medical collection debt will no longer appear on U.S. consumer credit reports. In other words, once you’ve satisfied a medical debt which has been sent to collections, it will no longer appear as negative information on your credit report. This is quite different from the negative information appearing on your credit report from traditional debts such as unpaid credit cards or defaulted loan repayments. These marks will stay on your report for up to seven years, even after collections have been satisfied.
Additionally, the time before unpaid medical bills appear on your credit report has now been doubled. Previously, you would have up to six months to address medical bills which have been sent to collections before these debts would appear as negative information on your credit report. Recent rule changes have stretched this period into a full year.
This gives consumers more time to make payment arrangements with medical providers, insurance companies, and debt collectors before burdensome medical bills can do any damage to an otherwise good credit score. Bear in mind that most credit scores will reflect negative information from traditional debt collections such as outstanding credit card bills in as little as 30 days. This too underscores the unique treatment accorded to medical bills by credit reporting agencies.
The newest consumer protection relating to medical bills was just enacted in April of 2023, and is expected to benefit the widest spectrum of consumers. As of this spring, any medical collection debt with a balance below $500 will be removed entirely from U.S. consumer credit reports. Equifax projects that this will result in improvements in credit score ranges for as many as 70% of Americans with medical debt on their credit reports.
CapitalOne also recently reported that medical debt collections will no longer impact credit scores for certain credit scoring models. VantageScore–the model used in tandem by Equifax, Experian and TransUnion–no longer counts medical collections in its 3.0 and 4.0 scoring models. This change could raise VantageScore ranges by as much as 20 points for many consumers.
But CapitalOne warns that this protection is not universal. Different credit scoring models use different factors. As of the time of writing, your FICO scores will continue to reflect medical bills which have been sent to collections.
The takeaway from the partial protection above, and from all the protections listed here, is that you remain responsible for addressing your medical debts. While you may have greater leniency with medical care than with other credit accounts, failing to address these debts will eventually lead to a decline in your credit score.
With that in mind, let’s take a closer look at the different ways that medical bills can hurt your credit if left unpaid.
Ways That Medical Debt Can Lower Your Credit Score Range
In spite of the many protections that exist for consumers dealing with healthcare related expenses, the credit card debt statistics that the Journal of the American Medical Association states that medical debts are the number one reason that American consumers are contacted by debt collectors. And that’s because even those with good insurance coverage, excellent credit scores, and outstanding financial health can be faced with surprise medical bills.
Experian notes that “Medical care is obviously an important part of staying healthy, but costly medical bills can cause your bank account to suffer. According to recent estimates from the Peterson Center on Healthcare and Kaiser Family Foundation (KFF), over 3 million people owe over $10,000 in medical debts. And millions more carry smaller medical debts.”
For many Americans, these sudden and mounting medical bills can feel insurmountable. The threat to your credit scores can only magnify this feeling. In order to avoid this situation, let’s take a closer look at some of the impacts that unpaid medical expenses can have on your credit scores.
Credit Bureau Reporting
To reiterate, medical providers do not report to the three credit bureaus informing your VantageScore. So for as long as your account remains in the hands of your medical provider, neither your late or missed payments will be visible on your credit report. However, if you do not address these debts directly, they will eventually be sent to third-party debt collectors.
These collectors will absolutely report your debt to each major credit bureau. Within the confines of the protections listed in the section above, medical bills that go unpaid with third-party collection agencies for more than a year will appear as negative information on your credit report.
Credit Score Drop
In addition to appearing as negative information on your credit reports, medical expenses which go unpaid through debt collectors will likely also lower your FICO scores. Historically, this would also have negatively impacted your VantageScore calculation too but, as noted above, recent rule changes now mean that medical collections won’t hurt your score.
But this should only be viewed as a partial protection. Indeed, your FICO score may reflect the negative information for an undetermined amount of time. This negative information, and your lower FICO score, could have a direct impact on your ability to receive personal loans such as a mortgage or auto loan.
Rejection for Loans and Credit Lines
To expand upon the last point, your lower FICO score signals to lenders that you are a lending risk. Your medical debt also suggests to some lenders that you may have difficulty meeting new borrowing responsibilities. This can make it harder for you to get approved for new credit lines or loans and can severely limit other financial options. Your lower credit score may cause you to be denied for things like retail credit cards, gym memberships, and even rental applications.
To this last point, landlords will often conduct credit checks as part of the review of prospective tenants. The goal here is to determine whether or not the tenant is likely to pay rent reliably and on time. A negative credit history, even one caused by an outstanding medical debt, can result in a rental application denial. Alternatively, the landlord may simply require you to put down a larger security deposit. Either way, your unpaid medical bills may make the process longer, more difficult, and costlier.
Spiking Interest Rates
If your unpaid medical bills don’t result in loan or credit line denials, they will almost certainly result in less favorable borrowing terms. And these terms can significantly outlast even the negative information lurking in your credit report.
Indeed, credit score rehabilitation is a slow and steady process. So if your medical bills do end up in collections, and your unpaid debt results in negative information on your credit report, there could be lasting consequences well beyond the life of your debt. For instance, carrying this negative information on a credit report could make borrowing more costly for you. When you apply for a new credit card, seek personal loans, or looking to lease a new car, your credit scores are central in determining your interest rate.
This rate of repayment can amount to a pretty huge sum of money over the life of a loan, especially if I’m talking about something like a 30-year fixed-rate home loan. If the negative information from your medical debt is still impacting your credit scores, this will be reflected by the higher interest rate given to you by lenders. So even as your credit scores recover and that negative information disappears, you’ll still be feeling the consequence every month when you pay your mortgage.
Aggressive Collections
So obviously, there are consequences when you fail to pay your medical providers. Even given existing consumer protections, you risk being sent to collections. So what happens if you don’t pay the debt collectors now pursuing you?
Keep in mind that as long as your debts go unpaid with a collection agency, the negative information will remain on your credit report. While new consumer protections mean that medical bill collection will be erased from your report once satisfied, this certainly does not apply to bills that you simply ignore.
It is likely that your FICO score will continue to decline as long as this debt is outstanding. You also face the possibility of harassing phone calls and letters, additional fines and penalties, and even long-term legal action. The longer your medical bills remain in debt collection, the more problematic they are likely to become, both as visible strikes against your credit and as snowballing expenses.
Legal Action
Speaking of snowballing expenses, the worst case scenario is that your unpaid collections debt ultimately spirals into a legal issue. This, says CNBC, “only happens in a small amount of cases.”
It does, however, happen. Between 2018 and 2020, a ProPublica report reveals, the largest hospitals and health systems in the nation used legal channels to pursue the recovery of medical debt from nearly 39,000 American healthcare consumers.
Naturally, the cost of your debt and the negative information appearing on your credit report would also be made more severe by these actions. Most healthcare providers or debt collectors will only use legal action as a last resort, specifically because legal action can be costly.
But if your medical debt is sizable enough to justify this expense, you could be on the receiving end of a threatening letter with official legal letterhead or much worse. You should also be aware that a negative legal judgment against you could actually stick around on your credit report for up to 10 years. Obviously, that’s an outcome you should make all efforts to avoid.
Tips for Preventing Mounting Medical Bills
As this discussion suggests, in spite of the unique consumer protections surrounding medical bills, debts, and collections, countless Americans still struggle with overwhelming healthcare expenses. The protections I’ve discussed here do not relieve Americans of the often heavy financial responsibilities that come with utilization of the healthcare system. These protections simply give more time and leniency when it comes to meeting responsibilities.
So how can you use that time and leniency to your advantage? There are a few steps you can take to preempt the involvement of debt collectors, and most especially so you can prevent the involvement of the national credit bureaus.
Contact Your Insurer
Reach out and seek a clearer explanation of benefits. Make sure you’re receiving all the coverage that you deserve. Have you been denied coverage for treatment that you believe should actually qualify for reimbursement based on your insurance policy? It probably won’t surprise you to learn that this happens all the time. Be prepared to dispute any coverage denial that you believe was done in error…or in the name of profitability.
Dispute Errors
Speaking of errors, Equifax advises that “if you believe that a debt has been listed on your credit report mistakenly, contact the medical provider or collection agency first. You can also file a dispute with the three NCRAs. At Equifax, you can file a dispute at myEquifax. Visit the dispute page to learn other ways you can file a dispute on your Equifax credit report.”
This is an absolutely critical step. According to CNBC, a troubling 80% of all medical bills may contain errors! That’s way too many…but it does give you some leeway for discussion with your insurance company. Review your medical bills and the statements that your insurer provides you based on your medical claims. Be sure that all the information matches up, that it’s consistent with your coverage options, and that you aren’t the victim of shoddy math.
If you catch these mistakes before they leave your medical provider’s accounts receivable department, you could spare yourself a lot of trouble in the long run.
Negotiate With Your Healthcare Providers
If you’ve reviewed your medical bills and your coverage options, and the information seems to be both fair and accurate, move on to phase two–negotiation. If you simply can’t afford to pay your bill based on the sum total, the due date, or both, discuss the issue directly with your medical provider. There may be a number of options available to you.
Your medical provider may be able to offer a payment plan, or a reduced overall price if you are able to settle the full amount by a certain date. Many medical providers can also provide you access to a financial assistance program. Larger healthcare networks often provide these assistance programs directly, while smaller healthcare providers may refer you to community or non-profit agencies that can help. Be sure you explore all possible avenues rather than allowing medical debt to balloon out of control or reach the hands of debt collectors.
Beware of Using Credit Cards to Pay Medical Debts
One option that some medical providers may offer is access to a healthcare-focused credit account. Here, you may be able to apply for a credit card with a temporary zero interest repayment period–usually 6 months to a year. If this is your only option in lieu of allowing a debt to reach collections, I would strongly advise approaching this option with caution for a few reasons.
First, while you may enjoy a temporary interest free repayment period on this new account, the end of that grace period will usually result in a very steep escalation of your interest rates. This could quickly inflate the size of your debt if you aren’t prepared to pay it off in total by that date.
Moreover, you should avoid using a credit card to pay for medical expenses, as it can now open you up to a whole new range of credit risks–many of which would not have existed if you remained in debt with your medical provider. For instance, moving this sum to a credit card would likely raise your credit utilization ratio. If this pushes your utilization ratio beyond 30%, you may see a drop in your credit score. This contrasts medical debts, which do not count toward your credit utilization ratio.
Finally, and most importantly, once you’ve moved your medical debts to a credit account, you are no longer insulated by the special protections given to medical bills. Specifically, late payments and missed payments will now be reported to your credit bureaus; negative information such as accounts in collections can appear on your credit reports in as little as 30 days and can take up to 7 years to disappear; and all of this information can have a direct and long term impact on your credit scores.
All of this is to suggest that you are typically better off finding ways to navigate your medical bills directly through your healthcare provider, insurance company or, given the unique protections for medical debts, perhaps even debt collectors, as opposed to moving your medical debts on to a credit account.
Conclusion
As noted just above, while consumers enjoy certain protections from unpaid medical bills, the same is not true when it comes to your payment history with credit card issuers, mortgage lenders, and more. Excellent credit scores range between 740 and 850. Make sure you’re doing everything you can to stay in that zone.