During a medical emergency, how you’re going to pay the medical bill or if unpaid medical bills will end up on your credit report are the last things on your mind.
You may not even know how much this unexpected event will cost until you get the medical bill.
Medical bills are so dangerous because, at the time of an emergency, many of the costs are hidden in the complicated web of insurance policies.
Jonathan Walker, Exe. Director, Center for New Middle Class
Those costs can hurt your credit score if you don’t pay them. Medical debt that’s paid late or not paid at all can go to collections and affect a credit report.
In this article, we’ll look at what happens when medical bills go to collections, how medical bills affect credit, how to avoid that, and how to remove medical bills from a credit report.
Medical bills are different to regular expenses. When you’re in the hospital emergency room, shopping for the best and cheapest service isn’t an alternative.
When a child breaks her arm, it would be nice to shop around for the best price on a cast like you might for a new water heater, but it just doesn’t work that way. Most of the time, you can only deal with medical expenses after the bill is in your mailbox.
Many unprepared for emergency expense
Many people can’t afford to pay a small-scale financial disruption in their lives, let alone larger medical debts.
A survey by the Kaiser Family Foundation and the New York Times found that among the insured and uninsured with medical bill problems, 31% said the total amount of the bills they had problems paying reached at least $5,000. Thirteen percent said their medical bills totaled at least $10,000, and 24% said it was less than $1,000.
Even a $400 emergency expense is enough to challenge many people, according to a 2015 Federal Reserve report. The report found that 46% said that an unexpected $400 expense would leave them unable to pay it or they’d have to borrow or sell something to do so. Among people who wouldn’t pay the bill in full with cash, 38% would use a credit card and pay it off over time, and 31% couldn’t cover the expense.
How medical bills affect credit
Whether an unpaid medical bill ends up on your credit report depends on a few things. The first is if your doctor’s office reports a late payment or unpaid bill to the three major credit bureaus.
A large hospital may, but a small doctor’s office may not. Either way, if your medical provider turns your debt over to a collection agency, then the unpaid debt is likely to show up on your credit reports.
The largest part of a credit score is payment history. It accounts for 35% of a credit score and shows if you’ve paid past credit accounts on time or missed payments. Not paying an account at all, such as a medical debt, counts as a negative mark on your credit history.
A huge drop in your credit score can cause credit card companies and other lenders to deny your applications or can cause lenders to charge you higher interest rates.
Medical debts now weighed differently
Credit scores from the Fair Isaac Corporation, or FICO, are the most used. Most lenders in the U.S. use an older version of the FICO credit scoring system, says Michelle Black, a credit expert at HOPE4USA.com, a credit education and restoration program in Charlotte, N.C.
These older scoring models are designed to pay attention not so much to the type of collection or even the balance of a collection, but rather to the fact that a collection occurred in the first place. Michelle Black
“Even a small medical collection account could potentially be just as damaging to your credit scores as any other type of collection account,” she says.
But things are changing. The newest version of the FICO credit score, the FICO 9, and the VantageScore 3.0 weigh medical bills in collections less than other unpaid accounts.
The bad news is that most lenders don’t yet use these newer scoring models, Black says.
If you pay a medical bill with a credit card, you lose the new medical bill protection in FICO’s latest credit scoring system if the credit card bill is paid late, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.
“Once debt is owed to a credit card provider, it is not possible to distinguish whether the debt was from a hospital, vacation or a shopping spree,” Gallegos says.
FICO also changed how it deals with unpaid bills that are settled. Overdue or delinquent bills that have gone to collections — which include significant medical debt — no longer count as unpaid bills once they’ve been settled, Gallegos says.
Previously, if you had a bill that was 60 days past due and went to collections, and you then paid the collections department, that event would still have been calculated in your credit score as unpaid,” he says. “Now, the score will treat paid bills as paid bills.Kevin Gallegos
Pay off the debt or wait seven years
Collections can only stay on a credit report for up to seven years. If you can wait that long, then the medical debt will go away, and your credit score should improve.
If you want your credit score to improve during those seven years, some lenders may want to see that you’re paying off collections that are less than seven years old. Others may not care and may continue denying you credit during the full seven years.
The more recent a collection is, the more it will hurt your FICO score. Recent unpaid bills affect your credit score more than olders medical bills, which may persuade you to pay off more recent medical debts and let old ones fall off your credit report.
If you don’t want to wait seven years until the medical debts are removed from your credit reports, you could pay off the medical debt through the collections agency.
You can try to negotiate a debt settlement with the debt collector, agreeing to a monthly payment that fits your budget. Get the payment plan in writing and be sure that it releases you from the entire debt. Without such documentation, any payment could be treated as a partial payment, and the clock will reset the statute of limitations on how long you can be sued for an old debt. Most states set it at three to six years.
Even if medical bills have been turned to debt collectors, there are still ways to protect your credit. “They will always work with you if you’re paying them something,” says Randall Yates, CEO of The Lenders Network, of collection agencies. “Then they won’t report it to the credit bureaus because they know your only incentive to pay is to prevent it from being on your credit report.”
Also, since collection agencies buy debt for pennies on the dollar — usually less than 10-20% of the balance, depending on the volume of debt they buy, Yates says — you can often work out a settlement for 50-60% or less of the amount they’re asking for.
Contest your medical debt
When you first learn about any medical debt, make sure it’s accurate. You can call or write the credit bureaus to make sure the account belongs to you, Yates recommends.
The credit bureaus will contact the collection agency to request information to validate the account. The collection agency has 30 days to respond, or the account will be removed from your credit report, says Yates, who estimates that 75% of medical collection accounts will be removed.
The best way to deal with a medical debt is to do it early.
“If you receive a medical bill which you cannot afford to pay, your best bet is usually to pick up the phone and give the medical provider a call,” says Black, the credit expert.
Sometimes you can set up an affordable payment plan with the doctor or hospital which will prevent the unpaid medical debt from ever being turned over to a collection agency in the first place — thus protecting your credit from damage.
Are you struggling to pay off medical debt? If you are loaded down with unsecured debt, such as unpaid medical bills, you may qualify for a debt settlement program. Click on the link below for a free consultation with a debt settlement expert.