Will Medical Debt Hurt My Credit Score?

Katie McBeth  | 

If you live in America, chances are you will have to deal with medical bills sometime in your life. Whether it’s from an accidental broken arm, or from a bad bought of food poisoning: sometimes life’s medical expenses can get pricey. That is especially so in the United States.

However, medical bills can get out of hand very fast and very easily. How are you supposed to save up for an emergency when a simple trip to the ER can wipe out all of your savings? How are you supposed to protect your credit score when your health is declining or an accident happens?

Since many Americans will have to deal with this sometime in their life, it’s important to know what you can expect to see from a high and defaulted medical bill on your credit report. Unlike most other forms of debt, medical bills can come on unexpectedly and aren’t done for the sake of building credit or making an investment. Overdue accounts can easily go to collections, which in turn can cause a lot of headaches.

Here at Fiscal Tiger, we want to provide you with some medical relief from your financial worries. Let’s dive into the effect medical bills can have on your credit score.

Medical Debt By the Numbers

Discussing medical debt might bring to mind the stories of cancer patients who had to pay millions of dollars for treatment. But the reality is actually quite different.

A survey from 2014 by the Consumer Financial Protection Bureau that sampled 5 percent of all credit reports found that most medical debt averaged at about $579, with a mean amount of $207. That doesn’t seem like much, but when many hospitals only wait 30-60 days for payment before sending the account to collections, that small amount could cause of world of hurt to your credit score.

Surprisingly, 52.1 percent of all debts sent to collections in the United States are related to medical bills. Overall it affects 43 million Americans, and about 22 percent of those with medical debt in collections have no other form of collections. That means they’re otherwise diligent people who often pay their bills on time, but due to the confusion surrounding medical payments (such as what is owed to whom, and whether their insurance will pay the bill or not, and when it is owed) this often results in damaging collection accounts. In addition to the confusing landscape of healthcare finances, medical collections can cause some serious stress for those that fall victim to it.

Healthcare and Your Credit Score: Changing Tides

Luckily for those 43 million Americans with medical debt in collections, there have been a few changes over the years in the severity of medical bills, at least in terms of reporting and using it to calculate your credit score. Let’s look at some of the ways medical bills have been treated in the past five years.

Prior to 2016, many lenders saw medical collections just as any other delinquent account. This meant it would show up on your credit report even after it was paid, but its impact on your credit score would decrease in severity as time passed. This is the same with any other debt account that has gone to collections: the account and your history look less insecure to creditors over time, as long as you avoid letting any other debts become delinquent. Since many lenders are still using this rule in determining your credit score, it is vitally important to pay off your medical debt as soon as possible if you’re interested in saving your credit score.

However, more recent changes have resulted in some credit bureaus not weighing medical collections as heavily as they had done before. They are able to differentiate between medical and non-medical collections to make a more accurate assessment of lending risk. Unlike most other forms of debt, medical debt does not always reflect consumer choice or foreknowledge of the risks and rates involved: such as insurance coverage, additional charges, deductible, and more. With loans, lenders are obligated by law to disclose interest rates, terms, and the amount of loans being made. Medical costs are largely opaque, and vary depending on a variety of factors. This complicates the question of whether medical debt is a fair or accurate representation of consumer behavior, or lender risk.

According to a 2016 Experian Community Question: “With the newest credit scoring systems, now beginning to be adopted by lenders, if you pay a medical collection off, it will not be included in the score calculation, so paying that medical collection could help your credit scores right away (or at least within the next billing cycle).” This means it will only hurt your score as long as the debt goes unpaid. Once it is paid off, it will no longer be reported on at all.

More change is on the horizon, as the next big update to credit reporting and scoring standards will occur in the fall of 2017. This latest change in medical debt reporting is even more exciting, and will affect both FICO and VantageScore credit reports. As NPR writer Michelle Andrews explains in her article from July of 2017:

“Starting Sept. 15, the three major credit reporting agencies — Experian, Equifax and TransUnion — will set a 180-day waiting period before including medical debt on a consumer’s credit report. The six-month period is intended to ensure there’s enough time to resolve disputes with insurers and delays in payment.

In addition, the credit bureaus will remove medical debt from consumers’ credit reports once it’s paid by an insurer. Some credit scoring models don’t penalize paid medical debt from any source.”

This six month waiting period could be a major benefit to most people with medical bills in collections. It will give them the time they need to sort through insurance, and to figure out what is owed to whom. When the change rolls out, there is no doubt that millions of Americans could suddenly see a bump in their credit scores.

Unfortunately, there is a small catch. Not all lenders are up to date on the latest model being proposed by FICO and VantageScore. This latest adjustment will create FICO9 and VantageScore 4.0, the official names of the new models, but many lenders are still relying on older models to make their decision. Since those older models are still in use — and you can’t force lenders to use a more updated score model — many consumers with medical debt may still find it difficult to get approved for loans. Luckily, once a loan is paid off, it will look better on your credit score as time goes on.

No matter what your situation, the key take-away is to pay off your medical debt as soon as possible. Some scoring models will be able to provide you with a grace period, but older models could still haunt your score. Luckily, once a debt is paid, it can only improve your score over time.

Putting Medical Pain Behind Us

You may be surprised to find that millions of other Americans are also suffering from medical billing pains. You may also be surprised to find out how small that medical debt can be. Luckily, the three credit reporting companies, along with the FICO and VantageScore scoring models, will begin to reflect the pain points of consumers in the future, and will make adjustments that can benefit everyone with medical debt.

Medical collections may be keeping you up at night, but it no longer has to be a major headache for you moving forward. Pay off your debts if you can, and make it a point to put all your medical billing pain behind you.

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Katie McBeth is a researcher and writer out of Boise, ID, with experience in marketing for small businesses and management. Her favorite subject of study is millennials, and she has been featured on Fortune Magazine and the Quiet Revolution. She researches SEO strategies during the day, and freelances at night. You can follow her writing adventures on Instagram or Twitter: @ktmcbeth

This post was updated August 14, 2017. It was originally published August 17, 2017.