Credit Bureau Reporting - Changes Effective 7/1/2022 May Increase your FICO Scores:

KEY POINTS:

• The changes will eliminate an estimated 70% of medical debt from credit reports.
• Some of the debt will disappear this summer, and then more of it next year.
• The upshot should be improved credit scores, experts say.

If medical debt is hurting your credit score, that negative impact could soon disappear.  Changes to when such debt will go on credit reports took effect July 1, as announced by the three large credit reporting firms — Equifax, Experian and TransUnion — in March. The upshot should be improved credit scores among the consumers who are affected by the revised reporting policies.  “It’s a wonderful move for consumers and long overdue,” said Jeff Smedsrud, co-founder of HealthCare.com. 

Specifically, the credit firms will stop including medical debt that went to collections on credit reports after it’s paid off. Under current practice, it can remain on your record for seven years.  Additionally, consumers will get a year, up from six months, before unpaid medical debt appears on credit reports once it goes to a collection agency. And in the first half of 2023, the credit bureaus will stop including anything that is less than $500.  “A small debt of $25 ... can really negatively impact a credit score — just the reporting of it,” said Leslie Tayne, founder of Tayne Law Group and an attorney who specializes in consumer debt relief and debt settlement.

“It could mean the difference between being able to borrow [from a lender] and not being able to borrow,” Tayne said.  Roughly $88 billion in medical debt appears on consumer credit reports, according to the Consumer Financial Protection Bureau. Additionally, 58% of bills that are in collections and appear on credit reports are medical-related, and roughly 43 million credit reports show such collections.  This can lower your score, which makes it harder to secure loans or other credit, or get favorable interest rates if you are approved.

While some credit scores don’t treat medical debt as harshly as others do, lenders tend to use one that treats all debt in collections the same if it appears on your credit report. Additionally, employers or landlords may use either your credit score or report to make decisions.  At the same time, research has shown that medical debt is less predictive of a person’s ability to keep up with payments than other types of collection accounts.  While the credit agencies say their new policies will eliminate roughly 70% of medical debt from credit reports, the remaining share is concerning, said Chi Chi Wu, staff attorney at the National Consumer Law Center.

“That 30% is definitely a big problem,” Wu said. “The folks who owe the bigger bills are the people with, maybe, cancer or long Covid, or they’re uninsured or underinsured and something catastrophic happens.”  About 11 million Americans have medical debt above $2,000, and 3 million owe more than $10,000, according to the White House.  The Biden administration announced plans earlier this year to eliminate medical debt for low-income veterans as well as plans for all federal agencies that make loans to stop considering such debt in determining a consumer’s creditworthiness.   The CFPB, meanwhile, is examining whether medical billing data should be included in credit reports at all.  Additionally, there are various bills in Congress that address the issue. One proposal is to prohibit the inclusion of “medically necessary” debt. Generally speaking, this would mean unpaid bills for elective procedures or services — i.e., cosmetic surgery — would still show up on credit reports if above $500.

Can I stop medical bills from affecting my credit?

You can take some steps to prevent future medical bills from affecting your credit.

• Follow up with your insurance company. Understand your insurance policy and follow up by phone or email to make sure the company is paying the bills it has agreed to cover.
• Negotiate unmanageable bills. When you can’t afford to pay a bill, contact your medical provider and try to negotiate it down or ask for a payment plan. If you’re successful, get the new amount you owe in writing so that you have a record of your agreement in case of a future dispute.
• Get your unpaid debt under $500 by the end of 2022. Starting Jan. 1, 2023, all medical debt less than $500 will not appear on credit reports from the three major bureaus. The bureaus made these decisions after a review of medical debt revealed that, for most people, the debt was a result of a one-time or emergency event. If you have unpaid medical debt, it would be a great idea to try to get it below $500 before the end of the year so that it won't appear on your credit reports after Jan. 1.
• Consider hiring a billing advocate. If you’re overwhelmed by your bills and aren’t sure how to proceed, think about hiring a medical billing advocate. This professional can sort through your bills and try to negotiate them on your behalf.
• Crowdfund your medical bills. Set up a fundraiser with a crowdfunding site such GiveForward to get help with your bills from family, friends and strangers — though it's not a surefire way to pay off medical debt.

Ask your Creditor which FICO Scoring system they use:

• FICO 8, the credit scoring model most lenders rely on, treats collections accounts the same, no matter whether they're paid or unpaid. So the damage has been done regardless of whether you pay — although paying will get the bill collector off your back and remove the risk of it suing you for payment.
• The FICO 9 scoring model and the VantageScore 3.0 disregard collections accounts that have been paid. FICO 9 will weigh medical bills in collections less heavily than other types of unpaid accounts. However, FICO 9 is not in widespread use by lenders. VantageScore 3.0, a competitor to FICO, is more widely used.
• Collections accounts can take around seven years to drop off your credit report, although the impact on your credit score will lessen over time. To help your score rebound, the best thing to do is keep consistent credit habits as much as you can, such as paying your other bills on time and keeping your credit card balances low.