Medical debt can have a significant impact on a consumer’s credit history. Providers will often send unpaid medical debts to a collection agency, which, in turn, will report the debt to a consumer reporting agency such as Experian, Transunion, or Equifax. This, in turn, will result in a derogatory item on the consumer’s credit report and a resulting decrease of the consumer’s credit score.
Medical debt represents an enormous portion of the negative debt collection entries that appear on consumer credit reports. A 2010 study found that medical debts constituted more than half (52.2%) of the debt collected by debt collection agencies in 2010—more than twice as much as credit card and other financial debt (The Impact of Third-Party Debt Collection on the National and State Economies, available at http://www.acainternational.org).
The medical billing process tends to cause confusion, which results in bills being sent to collectors when consumers are uncertain about how much they owe, or that insurance failed to cover a portion of the medical bill, or for many other understandable reasons. In addition, disputes between health insurers, providers, and consumers occur frequently and can be of extended duration. Many medical bills are sent to collection agencies during these disputes, as some providers will refer a bill as quickly as within sixty or even thirty days even though the bills are ultimately paid by insurers. A consumer’s credit history and credit score may be damaged as a result of such debts being sent to collection agencies during disputes or when an insurer is simply slow in paying the bill. The damage is done even after the bill is paid, as an account reported as a collection matter will remain on a credit report even after the balance is paid off.
In response to these issues, the three major credit reporting agencies (Experian, Equifax and Transunion) reached an agreement with a multistate group of attorneys general to refrain from including unpaid medical debt in a consumer’s credit report if the debt was delinquent for fewer than 180 days when it was reported. In addition, the three major credit reporting agencies agreed to a process to remove medical collection accounts from consumers’ credit reports if the debts are paid in full by an insurer.
Medical debt is less predictive than other types of debt, probably as a result of the unique aspects discussed above. A recent study by the Consumer Financial Protection Bureau found that the presence of medical debt on a consumer’s credit report unfairly penalizes a consumer’s credit score, resulting in a credit score that is typically lower by ten points than it should be. For consumers who have a paid-off medical collection item, their scores are up to twenty-two points lower than they should be.
Providers of credit scoring models have made changes to reduce the unfair penalties caused by such debt. In 2014, FICO announced that it would no longer consider paid collection items (both medical and non-medical) in the latest version of its scoring model. A second provider of credit scoring models, VantageScore, had already made a similar change to its scoring system. In addition, FICO has said it will give less weight to unpaid medical debts; consumers whose only negative item is unpaid medical debt can expect their score to increase up to twenty-five points. However, these reforms will not completely eliminate the negative impact of medical debt on credit reports. Most importantly, they probably will not benefit mortgage applicants because the changes only affect FICO’s latest scoring model (FICO 09). Apparently neither FICO 09 nor VantageScore are used by mortgage industry giants Fannie Mae and Freddie Mac.
Another troubling aspect of medical debt in credit reports is that, in many cases, the consumer is never contacted by a collector or even sent a bill by the original provider. Instead, the first time some consumers learn about their medical debts is when they examine their credit reports—sometimes in the midst of seeking a mortgage or other credit—and learn of a damaging collection account, a phenomenon called “parking.”
Medical debt is sometimes also reported on the credit reports of spouses or other relatives. Medical debt has even appeared on credit reports as a result of “medical identity theft,” in which a thief incurs medical bills in the name of the victim.
If you have unpaid medical debt appearing on your credit report, and you believe there is an error, contact us for your free Credit Discrimination / Fair Credit Reporting Act evaluation today.