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Changes to how medical debt affects credit scores
When it comes to credit scores, all debt is not created equal. While credit card balances, personal loans, and other forms of consumer debt are factored heavily into an individual's credit score calculation, medical debt has historically been viewed differently by the credit reporting agencies. Unlike traditional lenders, your doctor or hospital typically doesn't report unpaid bills to a credit reporting agency. Healthcare providers usually send the unpaid bill to a debt collector, which in turn reports it.
Thankfully, if you’re one of the many with looming medical debts on your credit report, the three largest credit bureaus – TransUnion, Equifax and Experian – started removing cleared medical debts from consumers credit reports beginning July 1, 2022.
This means that if you’ve paid your medical bill in full and the debt is still sitting on your credit report as a negative mark, this negative mark will now be removed. It’s part of a larger effort by the Biden administration to decrease or eliminate medical debt as a part of government lending decisions. And for the millions of Americans that are battling an estimated $88 billion in medical debt, according to a report published by the Consumer Financial Protection Bureau, it’s a big relief.
How changes to medical debt could benefit you
The recent changes regarding how medical debt is reported and treated by the major credit bureaus are aiming to reduce its negative impact on credit scores. That’s good news for consumers like you.
- Waiting period before reporting medical debt. As of July 2022, the three major credit reporting agencies implemented a 180-day waiting period before new unpaid medical collection debt can appear on consumer credit reports. This 6-month grace period gives patients more time to resolve outstanding bills with insurance companies or set up payment plans before the debt can potentially hurt their credit scores.
- Removing paid medical debt from reports. In addition to the waiting period, the credit bureaus also announced that any paid medical debt that has already been reported will be removed from consumer credit reports entirely. Previously, paid medical collections could still linger on reports for up to 7 years, continuing to damage credit.
- Lower impact of unpaid medical debt. When medical debt does eventually get reported after the 180-day period, its impact on credit scores will be lessened compared to other unpaid debts like credit cards. The credit scoring models are being adjusted to give less weight to outstanding medical bills in collection.
The goal of these reforms is to provide Americans with more time and leeway to address medical bills before potential credit score damage. It's estimated that these changes will prevent around 70% of previously reported medical debt from appearing on consumer credit reports going forward.
While medical debt still needs to be resolved responsibly, these industry changes represent a significant shift that could help protect the credit scores of millions of consumers facing medical hardships and billing complexities.
How medical debt can still negatively impact you
To be clear, the recent reporting policy does not mean consumers are off the hook for paying their medical bills. While medica debt will not appear on your credit score for one entire year, after that one year passes, your credit score will then be dinged if what you owe is over $500.
If you have a large amount of medical debt and don’t pay, the medical provider or debt collector could potentially file a lawsuit to collect on the debt, which could lead to garnished wages. While this only happens in a small amount of cases, it doesn’t mean that it couldn’t happen to you. Between 2018 and 2020, more than a quarter of the nation’s largest hospitals and health systems pursued nearly 39,000 legal actions regarding consumer medical debt, according to a ProPublica report.
Here are some steps you can take to help ensure your medical debt doesn’t end up turning into a lawsuit down the line:
- Negotiate with providers: Begin by contacting the healthcare providers directly and request itemized bills, payment plans, or potential discounts. Many hospitals and clinics are willing to work with patients to establish affordable payment arrangements.
- Utilize hardship programs: Many healthcare organizations offer financial assistance or hardship programs for individuals who are unable to pay their medical bills. Eligibility is often based on household income and size.
- Communicate with debt collectors: If medical debt does end up in collections, it's crucial to respond promptly and negotiate a resolution. Avoid ignoring collections calls, as this can lead to further damage to your credit.
- Dispute inaccurate reporting: Review your credit reports regularly and dispute any medical debt that appears inaccurately or prematurely on your credit history. The credit bureaus are required to investigate and remove any erroneous information.
- Seek professional assistance: Consider working with a credit counseling agency or financial advisor who can help you navigate the complexities of medical debt and develop a comprehensive plan to pay it off and protect your credit. If you’re interested in getting a free consultation with a dedicated debt relief specialist, JG Wentworth’s Debt Relief Program has helped many individuals resolve their debt over the years.*
Taking preventative measures
While addressing existing medical debt is essential, it's also crucial to implement proactive strategies to avoid future credit-related issues stemming from healthcare costs. Some recommended steps include:
- Maintain comprehensive health insurance coverage: Ensure that you have adequate health insurance to minimize out-of-pocket expenses in the event of a medical emergency or ongoing treatment.
- Build an emergency fund: Set aside funds in a dedicated savings account to cover unexpected medical bills and prevent the need to rely on credit cards or other forms of debt.
- Review medical bills carefully: Closely examine all medical invoices and statements to identify any errors or overcharges that could lead to collections activity.
- Monitor your credit report: Regularly review your credit reports from all three major bureaus to catch any medical debt issues early and dispute them promptly.
By taking a proactive and holistic approach to managing medical debt – combined with the recent changes by the credit bureaus – you can protect your credit score, maintain financial stability, and focus on your health and well-being without the added stress of damaged creditworthiness.
SOURCES CITED
Levey, N., “Sick and struggling to pay, 100 million people in the U.S. live with medical debt.” NPR. June 16, 2022.
Lopes L, Kearney A., Montero A., Hamel L. & Brodie M., “Health Care Debt In The U.S.: The Broad Consequences Of Medical And Dental Bills.” KFF. Jun 16, 2022.
Balasubramanian, S., “Healthcare Costs Will Increase Significantly Over The Next Decade.” Forbes. June 20, 2023.
Rosato, D., “What Medical Debt Does to Your Credit Score.” Consumer Reports. July 26, 2018.
Paul, T., “More than 30% of Americans have medical debt: What you need to know about negotiating a medical bill.” CNBC. April 2, 2024.
Deam, J., “Some Hospitals Kept Suing Patients Over Medical Debt Through the Pandemic.” ProPublica. June 14, 2021.
*Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.
