Is Medical Debt Making Your Credit Report Sick?
The complexity of our health care system is contaminating financial lives in more ways than one. Due to a lack of transparency and oversight, millions of credit reports are burdened with medical debt that does not accurately reflect credit worthiness.
Not all debt is incurred equally. Unlike most other expenses in life, medical costs are not commonly known ahead of time. A sudden illness or accident can lead to expensive treatments from multiple providers, resulting in multiple bills. Issues can also arise between medical providers and insurers, further complicating the billing process for consumers. When a medical bill goes unpaid, after a certain amount of time, it may be sent to a debt collector. However, there is no standard practice on when overdue medical debt is sent to a collector or reported to credit reporting agencies.
Some providers send unpaid bills to collection agencies as soon as 30 days after billing, while others may wait up to 180 days. This haphazard system has created a mess in credit reports. According to a new study from the Consumer Financial Protection Bureau (CFPB), 43 million Americans have overdue medical debt on their credit reports, and a depressing 52% of all collection accounts on credit reports are medical.
Adding insult to injury, 15 million Americans would have clean credit reports if it were not for medical debt and tend to be more reliable bill payers than consumers with other types of collections on credit reports.
Medical collections accounts average $579, less than many other types of debt. In comparison, automotive collections average the most ($5,587), followed by credit unions ($3,174), educational ($2,894), and banking ($2,620). The smaller average on medical debt suggests that consumers may be confused about what they owe, believe the debt has already been paid, or actually don’t owe it. A collection item on a credit report could lower a FICO score of 680 by 45 to 65 points. A FICO score of 780 could drop by 105 to 125 points.
While we don’t have a cure for all of these issues, the CFPB is taking more action. The consumer watchdog will be requiring reporting companies to provide regular accuracy reports as part of ongoing examinations. This will help identify which industries and organizations generate the most credit disputes, increasing accountability.
Credit reporting companies will be required to investigate organizations that receive high rates of disputes. The IRS is also proposing a policy that would require nonprofit hospitals to wait at least 120 days before engaging a third-party collector and reporting debt to a credit agency.
Earlier this year, Fair Issac Corp., the nation’s most popular provider of credit scores, announced it will change its calculations so medical collections have a lower impact on credit scores. The median FICO score for consumers whose only major negative references are medical collections will increase by 25 points. It will take time for the new scoring model to be fully implemented, but it’s a step in the right direction.
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