How Medical Bills Impact Your Credit Score

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medical debtMedical bills have the potential to wreak absolute havoc on a person’s credit. Large amounts of debt, medical or otherwise, have a long history of demolishing credit scores and taking away financial freedom.

Given the often unexpected and sudden way in which medical bills can hit credit reports, this type of debt can be especially damaging. Unlike credit cards and other debt, medical bills are not built up slowly and there is no spending limit, so the potential for large-scale damage is much greater.

According to Anthony Sprauve, a spokesman, accounts in collections can lower an individual’s FICO score by up to 100 points. If you have ever tried raising your credit score, you can attest to how hard it is to raise it by as few as 10 points. Imagine trying to recover from a 100-point hit.

Those with the highest credit scores definitely have the most to lose as far as credit worthiness, and they are the ones who usually see the largest dings as a result of collections.

Even after the bill is paid in full, the item remains on a credit report for seven years. Although the impact of the collection on your credit score will diminish as the collection gets older and will eventually “fall off,” medical bills can cause quite a stir in your finances by limiting your credit opportunities. As a result, you might only qualify for high-interest, high-fee loans and credit cards.

Medical bills are the number one reason for filing bankruptcy in the U.S. Adding insult to injury, bankruptcy can stay on a credit report for up to a decade, three years longer than a negative credit rating due to a debt collection.


Credit Utilization Ratio

credit ratioA lender will determine how much to lend you based on your credit score. Varying opinions exist on the ideal percentage of credit utilization. However, let’s assume that the ideal goal for percentage of available credit is 30 percent or less.

According to this figure, you should not have a balance of more than $3,000 if you have a $10,000 limit on a credit card. If you have the aforementioned $10,000 of available credit, but a $15,000 medical bill gets reported to your credit report, you will be in debt $5,000 more than you have been officially allotted.

This is a red flag alerting lenders that you live beyond your means. This may not sound fair since your high debt is not due to frivolous spending, but sadly, it is the truth in many situations.

Some lenders do their own calculations, removing medical debt from the equation because they believe that medical debt is usually incurred out of necessity rather than poor spending habits. Therefore, these lenders might be more willing to take the risk of lending money as long as the credit report is otherwise healthy.

Because some lenders have chosen to be flexible about the presence of medical collections on a credit report, and there hasn’t been much backlash or a notable number of companies reporting remorse for extending credit to these individuals, it raises the question of why any credit scoring model would take medical bills into consideration.

Of course, there are people who could pay their medical bills and don’t, but can a score damaged from a one-time incident involving one’s health be a true indicator of whether or not a person is financially responsible?


Errors on Credit Reports

Unfortunately, about 80 percent of all medical bills have some type of error on them, whether from double billing, abuse, inflated charges, or billing for services that were not received. Improper reimbursement from a patient’s health insurance company accounts for a large amount of billing errors. These instances only drive up the cost of your bill, further impacting your score via collections and credit utilization ratio.


Getting Some Relief

One good thing is that, with the latest system of FICO credit scoring, collections under $100 will no longer be considered when calculating a credit score. This will eliminate the negative impact of nearly one third of medical debt from affecting FICO scores. The other two thirds, however, will still make their negative marks.

The new Vantage Score system is a potential method of relief for consumers who are making payments on a medical bill. Created by the three major credit bureaus, TransUnion, Equifax and Experian, VantageScore offers a unique algorithm that better represents today’s consumers, offering numerous updates to the old systems of credit calculation.

medical bills couple

Under the newest version of this system, called VantageScore 3.0, medical debt cannot contribute to a credit score unless that debt has been given to an outside collection agency.

If passed, a new law will soon assist in lifting some of the burden.  Under this proposed regulation, collection agencies cannot report negative scores to the credit bureaus for six months if the consumer is disputing or negotiating the bill.

This is a great solution for anyone who feels their bill is inaccurate, believes the insurance company paid less than they should have or who might qualify for any type of financial assistance. After all, the system of calculating a credit score neither knows nor cares whether or not a charge is valid and what the consumer is planning to do about it.

This law would keep the consumer’s credit report clear of this debt until a reasonable amount of time has been given to the consumer to fix any errors.


Be Proactive

There are steps you can take to minimize the chances of having a medical bill negatively affect your credit score. Because of the large number of medical billing discrepancies, be sure to keep detailed records on all services, procedures and supplies you received as well as the names of doctors who treated you.

This will give you a jump-start on double-checking each charge’s validity. Often, medical bills do not arrive right away, and without accurate records, it may be difficult to discern valid from invalid charges.

If you receive a bill with charges for medications, services or procedures that you don’t remember, you can easily pull out your records and compare them with the bill. Place a check mark on any charge that does not seem correct.

Call the billing department immediately and question the validity of the charges in question. Keep asking for help from the billing department until you fully understand and agree with the charges.

The sooner these potential inconsistencies are taken care of, the better, since your prompt response will alert them that you have kept meticulous records and refuse to be overcharged.

Furthermore, they are already well aware of the high number of inaccuracies that occur in medical bills and may be more likely to work with you before the debt is sent to collections.


Communicate With Debt Collectors

Stay in constant contact with the billing department. A debt collection agency could begin reporting negatively to the credit bureau between one and six months after the first billing date.

If there are any questions or perceived discrepancies, stay in communication with them. This tells them that you are diligent and are working on it. If they know that you are not avoiding them but simply questioning the validity of some of the charges or having a hard time coming up with the funds, it might help prevent a negative report to the credit bureau.

It is much easier and often more cost effective to prevent a problem before it starts. It is clearly easier to keep bad marks off of your credit report than it is to remove them once they have been reported.

Whether medical bills should show on a credit report has been a subject of debate for quite some time. Many consumer advocates believe that unpaid medical bills are not a reliable indicator of a person’s credit worthiness but simply a sign that he or she had an expensive medical issue at some point within the past seven years.

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