A Guide to Medical Debt’s Impact on Your Credit Score

America’s personal debt problem may be the biggest in the world, but it’s not entirely unique. Many other countries have credit card debt and student loan issues; many leave their citizens at risk of bankruptcy and financial ruin. But there is one area where America really is suffering more than other countries: Medical debt.

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US medical bills are some of the highest in the world and what is normal to us would shock and appall individuals from Europe, Australia, and pretty much every other developed nation.  Credit scores are suffering as a result of this growing problem and in this guide, we’ll look at how medical bills impact your score and how you can rebuild your credit report if you have debt in collections.

How Medical Debt Affects Your Credit Score

Medical bills are escalating and doing indescribable damage to credit scores across the country because unlike credit card debt, it’s not something you can just choose not to have. Medical expenses are not a luxury you can afford to do without. If you need help, you need help, and you’re going to be hit with huge bills and a host of other issues.

The good news is that medical bills only affect your credit score if they enter collections. Hospitals and doctors rarely report account activity to credit bureaus. This means your credit score won’t take an immediate hit like it would with a debt consolidation loan, credit card or loan. It also means that your score won’t drop if you miss a payment.

However, if the account remains unpaid for several months then the medical provider may hand it over to a debt collector. The collection agency will then report to the credit bureaus and you may see your score drop by up to 100 points. Medical collections will remain on your account for 7 years—that applies to both paid and unpaid collection accounts. 

The lack of involvement from the credit reporting agencies means your credit score won’t improve simply because all payments have been made on time. However, it’s still important that you meet those obligations to avoid medical collections.

Medical Collections and Different Credit Scoring Models

As discussed in our guide to FICO vs Vantage, there are two main credit scoring systems and each system has multiple iterations. In the past, all these systems treated collections the same way, which meant your score would suffer the same with a credit card collection as it would with medical bills or personal loans. However, modern iterations, including FICO Score 9 and VantageScore 4.0, place less of an emphasis on the importance of medical collections.

  • FICO 8: All collections are treated as the same, although those with an original debt of less than $100 are ignored.
  • FICO 9: Medical collections are not as detrimental, and all paid accounts are ignored.
  • VantageScore 3.0: All paid collections are ignored.
  • VantageScore 4.0: Continues to ignore paid collections and doesn’t include any medical debt that is less than 6 months old.

A collection agency can still cause you a lot of problems and you also have to consider that not all lenders use the most updated credit scoring systems (in fact, the vast majority of VantageScore users prefer 3.0 to 4.0) so it’s still an issue that needs to be addressed.

How Do Consistently Late Monthly Payments Hurt Your Score?

Unless the medical provider reports to the three credit bureaus, late payments will not impact your score. If there are no medical collections, which typically occur when payments haven’t been made for 180 days, you shouldn’t have an issue.

Many medical bills remain unpaid because the debtor doesn’t know they exist. They may assume that their health insurance has covered the balance, only to be hit with a nasty surprise when their account is sold to a collection agency and their score plummets. Contact your health insurance provider after a doctor’s visit or hospital stay to confirm if there is a remaining balance.

You have plenty of time to clear this balance, so don’t worry if you’re hit with an unexpected bill. Keep reading to discover some of the ways you can pay medical bills quickly.

What is the Statute of Limitations on Medical Bills?

What happens if you just ignore your medical bills, will they disappear, can you bury your head in the sand and wait for everything to pass? The short answer is no, but it’s not quite as simple as that.

A lender has a fixed amount of time to chase you for a debt. This is known as the statute of limitations. It varies from state to state, but it’s generally around 6 or 7 years.

This law impacts different types of debt in different ways. Where medical debt is concerned, you are responsible for the debt for 6/7 years after signing the contract. Collection accounts will appear on your credit report, your score will be negatively affected, and you may face legal action.

Once that time period is up, then you are no longer legally responsible for the debt and it will disappear from your credit report. The debt doesn’t go away entirely, however, and you can still be sued by your original creditor. In such cases, the onus is on you to inform the courts that this time period has passed. 

There is no automatic process that instantly eradicates all medical debt as soon as you are no longer legally responsible for it. You can still be chased by a collection agency and you can still be dragged through the courts—it’s your responsibility to understand your rights and to remind others of them.

It’s also worth noting that while this law can help you to escape debts, it’s not the best way to do so. Your credit history will take a significant hit from resulting medical collections and you’ll be faced with a lot of additional stress and anxiety resulting from payment demands and legal threats. 

How Quickly do Unpaid Medical Bills Affect Your Score?

Medical bills will begin affecting your score as soon as they are passed onto a collection agency. The ball starts rolling when you miss a payment on the account, but only after 180 days will the debt be sold to the collection agency. In the meantime, you can try to negotiate a settlement, seek help from a medical bill advocate, or work with a debt settlement company like National Debt Relief.

Bankruptcy is also an option, but never an advisable one if your goal is to improve your credit report and maintain a strong score.

How to Remove Collections 

If you have been contacted by a collection agency, the following tips can help:

Educate Yourself

Check the account on your credit report and compare this to the original bill. Mistakes happen and can be costly when they do, so make sure that everything is above board and you’re not being charged money that you don’t owe.

There may have been a simple reporting error or a mistake with your health insurance. 

Ask for Proof

You have the right to desk the agency for information pertaining to the debt, including the total amount and the initial creditor. This is essential if you don’t believe the debt is yours or think you are being overcharged. Collectors, just like lenders, can make mistakes.

If you notice any discrepancies between the collections and the original bills, dispute them and have them removed.

Know Your Rights

Understand what you’re entitled to within your state of residence and educate yourself on your state’s statute of limitations and what collectors are legally allowed to do. If they try to sue you, you may discover that this period has passed.

Agree on a Settlement

Although the debt will disappear in time, it will still benefit you to pay it off in full. This looks better to potential lenders and will also make your life a lot easier for the next few years.

Collectors purchase debts for cents on the dollar and don’t want to waste time and money dragging borrowers through the courts. They also understand that medical collections are not as damaging as they once were and may be more willing to settle quickly and cheaply.

Options for Medical Debt Relief

Whether you’re dealing with credit card bills or medical debt, the best solution is always to repay them as quickly as you can, thus improving both your finances and your mental health, because even the most resilient of individuals will lose sleep when they have massive debts hanging over them.

Here are some options to consider for quickly paying those bills and getting back on track:

  • Get an Itemized Bill: Understand what you’re being charged for and if there are any mistakes or overcharges. This makes the next step much easier.
  • Negotiate: You can negotiate the bill to bring the price down, pointing to any areas in which you are being overcharged. You can also enlist the help of an auditor, who will locate issues and discrepancies and reduce the bill.
  • Payment Plan: Most providers are willing to negotiate payment plans that work around your finances. These lessen the impact that debt has on the patient, which reduces the risk of a default and therefore benefits both parties.
  • Credit Counseling: If you have a lot of debt and are struggling to make payments, a credit counselor can help. These services are provided for free by many credit unions and can give you some professional insight into your financial situation.
  • Consolidate: Consolidation will increase the total interest you pay on your debts, but it can also bring your monthly payments down and make your debts more manageable, while eradicating medical debt obligations. Take a look at our guide to Debt Consolidation Companies to learn more.
  • Hardship: If you have a low income then you may qualify for an income-driven hardship plan, which works much like an installment plan, but with longer terms and even more manageable payments.
  • Bankruptcy: It’s a last resort option, but it’s an option, nonetheless. Medical debt is classified as unsecured debt, which puts it in the same category as credit card debt and means it will be cleared when you file for bankruptcy. However, as discussed in our guide to bankruptcy and your credit score, it can cause significant damage and remain on your credit report for between 7 and 10 years (depending on whether chapter 7 or 13 bankruptcy is filed).

Summary: Medical Debt and Your Credit Report

Medical debt, like all debt, can seriously impact your credit report and your mental health. It is one of the largest and most financially crippling debts that Americans face in their lifetime and as a result, it’s the leading cause for personal bankruptcy, not to mention financial ruin, suicide, and countless other issues.

Fortunately, we’re finally waking up to the damage that this debt can cause and as a result, it no longer carries the weight that it once did. Not only are debts rarely reported until they enter collections, which can take up to 180 days, but modern credit scoring systems will ignore them if they’re small or new, dismiss them when they have been paid, and ensure they don’t affect scores as heavily as other collections do.

It’s still a destructive form of debt and one that needs to be dealt with, but these factors ensure that it is now easier than ever to escape medical debt and to live comfortably and financially free.