If You’re Haunted by Medical Bills, Your Credit Score May Get a Boost

If you’re among the millions of Americans grappling with medical bills, obtaining a mortgage or car loan will soon get easier.

The three major credit bureaus — Equifax, Experian and Transunion — recently announced sweeping changes to how medical debt will appear on credit reports. The overhaul will erase about 70% of medical debt from consumers’ credit histories. Here’s what’s changing:

• Beginning July 1, 2022, medical bills that were sent to collections but have since been paid off will no longer appear on credit reports.
• Unpaid medical debt that’s in collections won’t appear on your credit reports for 12 months, giving consumers more time to work with creditors and insurers before their credit is impacted. Under the current rules, medical collections debt appears on credit reports after six months.
• During the first half of 2023, medical bills of $500 or less that are in collections will be removed from credit reports.

One reason for the changes: Medical debt isn’t a good predictor of whether you’ll be able to repay other types of debt. Most medical debt is the result of a one-time or short-term expense, rather than ongoing spending habits. Because it’s difficult to price shop when you’re facing a health emergency and insurance coverage varies widely, medical bills are unpredictable for consumers.

How Changes to Medical Debt Reporting Affect You

Your credit score affects many facets of life, including whether you can get a mortgage, loan or credit card, along with how much interest you pay. Your payment history is the most important credit score factor, accounting for 35% of your score. Negative information, like a late payment or an account that’s sent to collections, typically stays on your credit report for seven years.

Unlike your bank or credit card company, doctor’s offices and hospitals usually don’t report payment history to the credit bureaus. They only notify the bureaus of medical debt once they’ve sent your account to collections.

Having an account that’s sent to collections typically results in a substantial hit to your credit score, whether it’s for a medical bill or any other type of debt, like a delinquent credit card balance or student loan. One single collections account can cause your score to drop by 100 points or more. The higher your score, the bigger the impact.

Even under the current rules, medical debt is treated differently from other debt in collections. Collections agencies can’t put delinquent medical debt on your credit reports for 180 days. If your insurer later pays the bill, the negative information must be removed from your credit report.

Some newer scoring models give less weight to medical bills than other forms of debt, or they don’t consider them at all. According to the Consumer Financial Protection Bureau, individuals who only had medical debt in collections saw their scores jump by about 25 points under the newer scoring models that give less weight to medical collections.

What to Do if You’re Facing a Medical Bill

The debt reporting changes don’t erase any medical bills. If you have unpaid medical bills, you still owe them. If you can’t afford a medical bill, you have many options for tackling the debt before it’s sent to collections. These include:

• Work out a zero- or low-interest payment plan with your provider. Hospitals and doctor’s offices will often let you pay small amounts in monthly installments.
• Negotiate with your provider to pay a smaller amount. If you can afford to pay at least part of the bill in a lump sum, start by offering 25% or 30%.
• For larger bills, you can hire a medical billing advocate to look for mistakes. Examples include duplicate charges and coding errors. As many as 80% of medical bills contain errors, according to the Medical Billing Advocates of America.
• Apply for financial assistance or retroactive Medicaid coverage. Many hospitals offer discounts and financial assistance if your income is below a certain level. Though the rules are complex and vary by state, you may also be able to qualify for up to 90 days of retroactive Medicaid coverage.

What to avoid: charging medical bills to a credit card. You’ll pay more in interest than you would with a payment plan unless you have a zero-interest period. But once you charge your medical debt to a credit card, that debt becomes credit debt. You don’t want to give up the protections afforded to medical debt, which are about to get more generous.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.