The great statesman, inventor and philosopher Benjamin Franklin once wrote that in this world, “nothing is certain except death and taxes.” Were he alive today, Franklin might look at the country he helped found and add medical debt to his list of certainties.
Life is unpredictable. Accidents happen and people get sick or hurt. The French might say “c’est la vie,” and Forrest Gump might pardon his French and say “s*** happens.” But when you get sick or injured, you need medical treatment. And in this country where health care is extremely expensive, unpredictable and often based on factors out of people’s control, if you can’t pay for it, you can quickly start racking up medical debt.
Being charged for medical treatment is different than taking out a loan. You often don’t choose to take on the debt obligation—you don’t tell an emergency doctor to give you some time to think over the terms and conditions and shop around for other options before they set your broken arm. The question is: Should your credit score suffer, and thereby make it more difficult for you to access mortgages, credit cards, auto loans, and, ironically, insurance, because of medical debt?
Medical billing can put people in a vicious cycle that can be difficult to escape from, sometimes propelling them toward bankruptcy. In a survey conducted by the American Journal of Public Health, a majority of people filing for bankruptcy cited medical expenses as contributing to their seeking relief.
But some help does appear to be on the way. This spring, the three major credit bureaus — Equifax, Experian and TransUnion — announced that medical collections with balances of $500 or less would no longer appear on consumer credit reports. So if you’ve paid your medical bill in full and the debt is still sitting on your credit report as a negative mark, that mark will now be removed.
“We understand that medical debt is generally not taken on voluntarily, and we are committed to continuously evolving credit reporting to support greater and responsible access to credit and mainstream financial services,” the chief executives of the credit bureaus said in a joint statement.
Traditionally, paid medical debt would remain on an individual’s credit report even after the debt had been satisfied, continuing to negatively impact their credit score. However, this new change will ensure that paid medical debt no longer appears on credit reports, resulting in a more accurate reflection of an individual’s credit payment history.
Ralph Leopold, financial advisor and managing director of Ralph Leopold & Associates, a financial advisory practice of Ameriprise Financial Services, said the decision can help many access better lending rates.
“The benefits of lower costs are clear in their contribution to your future, but the negative effects of higher rates can have a snowball effect on your life,” Leopold said. “Good credit is a key component to an efficient and effective financial life.”
While $500 might seem low, 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 last month, it’s a big relief.
“I think this gives potential borrowers a reprieve to know that their credit scores can start reflecting a more accurate credit payment history,” said Danielle Smith, mortgage operations director at Nola Lending Group. “This also allows for lenders to extend their reach to serve more customers and communities that were once adversely affected by reported medical debt.”
The alteration holds substantial benefits for low to moderate-income individuals, who may lack health insurance or the resources to address erroneous medical debt collection items. For these individuals, the removal of such items from their credit reports can have a transformative effect, enabling them to access better financial opportunities. Smith said these changes have the potential to affect a borrower’s ability to afford that home or car that was out of reach for them because their credit scores included those medical collections.
Some credit professionals have been “discounting” medical debt in making loan decisions, but the formal decision makes the policy universal. And credit scores aren’t the only factor that goes into lending decision making.
“While we do rely on credit scores to assist in decision making, we also judgmentally consider factors that disproportionately impact the score, including medical collections,” said Darren Hill, senior vice president and director of credit at Home Bank. Hill said he’s been “discounting” medical debt for “several years,” but he believes the most significant impact of the recent decision will be felt in lines of business where the raw credit score plays a much larger factor in approval, and in pricing decisions such as mortgage and auto financing.
For many, medical bills can start to pile up because they’re unable to afford the payments, but Hill said others may simply “overlook” them because they assume it’s being paid by a third party.
“Medical billing can be tricky, especially when an insurer or Medicare/Medicaid is involved,” Hill said. “The resulting collection item can significantly reduce the individual’s credit score, which can cause them to be declined for credit or pay a higher interest rate than they otherwise would have.”
Additionally, Hill believes that extending the “grace-period” for these items to appear on the credit report should allow sufficient time, in most instances, to resolve these issues before they are impactful to the individual’s credit score.
Hill said that while no one knows the “secret sauce” relating to how credit scores are calculated, people who have been in the industry for many years can make educated assumptions as to those factors which most affect the score. Removing paid medical debt from credit reports is helpful, but people still need to stay on top of their payments.
“Overuse of revolving debt is probably the second-largest factor impacting an individual’s credit score,” Hill said. “While we are constantly bombarded through television and social media ads with credit monitoring and credit repair type services, people should understand that timely payment of debt is paramount and has the most impact on their credit score.”
It’s also important to understand the gravity of “small-dollar debts” to fully appreciate the significance of the decision to remove them from reports. It’s often not just a single $500 medical bill. People usually receive multiple bills from several different providers, making the process difficult and confusing.
The potential impact is huge, too. The same CFPB report that found that more than $88 billion of outstanding medical bills are in collections found that medical debts constituted 68.9% of accounts reported by debt collection companies that base their fee on how much they collect.
People with low incomes, veterans and older adults are significantly impacted by medical debt. Black and Hispanic consumers are disproportionately more likely to have medical debt. And credit scores are lower in the South largely because of medical debt. The statistics show that 1 in 5 Americans is impacted by medical debt.
Did you know? In 2019, Americans owed at least $195 billion in medical debt, impacting approximately 41% of adults.
