For lots of people, unexpected medical expenses can turn into an enormous unexpected financial burden. This is demonstrated by the fact that over half of all debt listed on credit reports is related to medical expenses. As a result, often consumers find their credit score also suffers.
However, credit reporting agencies are about to change the manner in which they report and evaluate medical. Hopefully, this will lessen the impact medical expenses will have on credit reports.
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 provide 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.
As opposed to collecting past-due medical bills themselves, hospitals and doctors offices typically engage collection agencies. But the timing varies as to when providers take that step.
Forty-Three Million Americans Have Medical Debt in Collection That’s Adversely Affecting Their Credit
According to the most recent data found in a 2014 report by the U.S. Consumer Financial Protection Bureau (CFPB), the average amount of medical debt in collection was $579, compared with $1,000 for non-medical debt. For 15 million consumers, medical debt was the only blemish on their credit report, per the CFPB.
This may not be surprising given the growth in the number of people with high-deductible health plans and significant out-of-pocket financial responsibilities for healthcare. People who typically have good credit are now encumbered with huge bills.
Lenders use credit reports and credit scores to evaluate the risk that someone won’t repay a loan. The credit-scoring companies build algorithms that use the data in people’s credit reports to assign a three-digit credit score. This is typically between 300 and 850, which summarizes someone’s credit risk based on the information in a credit report at that time. Higher scores indicate lower risk.
Credit-scoring companies like FICO and VantageScore that develop these models have been adjusting their formulas to account for the fact that medical debt isn’t necessarily an accurate predictor of whether someone is a good credit risk.
The credit reporting agencies say consumers with medical accounts are less likely to default on these accounts as compared to non-medical accounts. To address this issue, newer FICO and VantageScore models differentiate between medical and non-medical debt; with medical debt in collections receiving a smaller penalty than those with non-medical collections. This change can make a difference in people’s credit scores.
Since many financial institutions have not adopted the newer versions of the credit-scoring models, nothing has changed for most consumers.
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