5 Facts Worth Knowing About Medical Debt and Credit

“But it’s only medical debt. Medical bills won’t really hurt my credit that badly, right?”

This sums up the general attitude from consumers regarding medical debt, medical collections and how they subsequently impact credit report and credit scores. It makes perfect sense because nobody chooses to get sick and incur large medical expenses.

The reality is that unpaid medical debts can be just as problematic as any other defaulted liability.

Here are five things you should know about medical debt and your credit reports:

1. How medical debt gets on credit reports

Through collection agencies, medical debt gets reported onto credit reports. Medical debt is not reported to the credit bureaus the same way as other consumer debts like auto loans, mortgages, credit cards and student loans, however.

Most medical debt will never show up on a consumer’s credit report as long as it has been paid.  If your debt goes into default, however, you can almost guarantee it will eventually end up on your credit reports.

When a medical debt goes into default it is almost always outsourced or sold to a collection agency. Once a collection agency is involved they will likely report it to the credit bureaus and therefore will show up on the debtor’s credit reports.

Even medical collections for a very small amount can have an extremely negative impact upon a consumer’s credit scores, even under FICO 9. The reason collections can be so problematic for credit scores is because the incident of a debt going to collections is very predictive of elevated credit risk.

2. Payment plans may be available, or not

Medical providers don’t like setting up payment plans with their patients. After all, they’re doctors, not creditors.

Medical providers are also typically not set up to handle a large volume of monthly payment plans, like a credit card issuer.

However, that doesn’t mean that setting up a payment plan with a medical provider is impossible.

If you receive a bill in the mail for an unpaid medical debt then the first thing you should do is pick up the phone and call the medical provider’s billing department and explore any options that will keep it from going into default.

If after your call you feel confident that the debt amount is accurate and you are able to pay the balance in full, then knock it out and be done with it. If paying the bill in full is not an option, find out what kind of payment plans the medical provider is willing to accept.

As long as you work out payment plan with the medical provider and you always make those payments on time then you may prevent your debt from turning into a medical collection. Keep in mind, however, that most medical service providers have clearly stated policies that payment in full is due the day of your service.

3. Difficult removing medical collections from credit reports

Once a medical collection finds its way to your credit reports then it’s probably going to be there for several years.

The Fair Credit Reporting Act, or FCRA, allows for collection accounts to remain on a consumer’s credit report for seven years from the date of default of the original account. Medical collections are no exception to that rule.

If, for example, you defaulted on your medical debt in June 2013 any collections pursuant to that debt can remain on your credit reports until June 2020.

Some consumers are under the incorrect assumption that paying a medical collection (or any collection account for that matter) causes the account to be removed from their credit reports. This is not the case. Paying a medical collection does nothing to change the credit reporting statute of limitations on the debt.

The only ways a consumer can have a collection account removed from his credit reports early is to convince the original creditor to “withdraw” it.

4. Billing errors don’t stop collection actions

It’s no secret that medical providers and insurance companies make billing errors. A consumer advocacy group known as Medical Billing Advocates of America believes that eight out of 10 hospital bills contain some sort of billing error.

Still, you won’t be able to hide behind the billing error when it comes time to pay the debt. The medical service provider will still want to be paid and if the insurance company is dragging its feet, it’s on you to make good on the debt.

After medical services have been rendered you will receive a bill in the mail from the medical provider for any uninsured amount still due. If you believe the bill or the amount of the bill is erroneous contact your insurance company right away.

If after speaking to them you have determined that they are not going to cover the whole amount then it’s in your best interest to pay the doctor’s office and avoid the potential downsides to defaulting.

If you are certain the bill is supposed to be paid by your insurance company then you can continue to pursue them for direct payment without the fear of your credit being ruined.

5. Medical debt treated differently in credit scoring

Credit scoring companies have changed how medical collections are treated. VantageScore 3.0, the newest version of VantageScore’s credit scoring model released last year, ignores any collections with a zero balance.

The newest version of the FICO scoring model called FICO 9, which is scheduled to be released in fall 2014, will also ignore collections with a zero balance.  This means the consumer’s scores should benefit if they are able to settle or pay their collections.

The new FICO scoring model is designed so that unpaid medical collections don’t penalize a consumer’s credit scores as harshly as other unpaid collection accounts. The change in treatment of medical collections with outstanding balances is another departure from previous versions of the FICO scores in that they all treated collections the same way when calculating credit scores.

While the news of the new scoring models sounds promising for consumers, keep in mind that lenders would need to use the newest FICO score or the newest VantageScore in order for consumers to benefit from this adjusted treatment of collection accounts.