During a medical emergency, the last things that you’re thinking about are how you’re going to pay the medical bill or if there are unpaid medical bills on your credit report.
You may not even know how much your healthcare 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
If you don’t pay your medical bills on time, it can negatively affect your credit scores. 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 on your credit report.
Medical bills are different from regular expenses. When you’re in the hospital emergency room, shopping for the best and cheapest service and confirming that your insurance company will cover the costs isn’t an option.
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 an emergency expense
38% of American adults prefer using credit cards to pay off medical debt. (Source)
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 problems paying for health care, 31% said the total amount of the bills they had problems paying was at least $5,000. Thirteen percent said their medical bills totaled at least $10,000, and 24% said it was less than $1,000.
According to a 2015 Federal Reserve report, many people don’t even have $400 in their bank account to cover an unexpected expense. 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% had no way to cover the expense.
How medical bills affect credit reports
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 information about late payments or unpaid bills to the three major credit bureaus.
A large hospital may report that information, but a smaller health care provider 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, damaging your credit scores.
The most important factor of a credit score is payment history. It accounts for 35% of your credit score and shows if you’ve paid past credit accounts on time or missed payments. Not paying an account at all, such as medical debt, counts as a negative mark on your credit history.
Missed and late payments remain on your credit report for seven years, which means it can take a while for your credit scores to recover from missed health care payments. Recently missed payments will affect your credit more than payments that you missed a while ago.
A huge drop in your credit score can cause credit card companies and other lenders to deny your applications or 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 model, such as FICO 8, 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. They also add a 180 day waiting period for medical bills. If the bill goes to collections, you have a 180 day grace period to resolve the issue before it shows up on your credit reports.
The bad news is that most lenders don’t yet use the newer scoring model, 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 it was from a hospital, vacation, or a shopping spree,” Gallegos says.
Still, credit cards are a popular way for people to deal with unexpected bills. Many card issuers offer products with intro APR deals. These deals let you put a balance on the card and pay no interest for a set period. The risk is that if you don’t pay the balance before the intro APR period ends, you’ll be left with an expensive credit card balance.
Personal loans are an alternative to credit cards for paying off medical debts. They don’t come with 0% APR deals but tend to have lower interest rates, which makes them helpful if you want to pay the bill over time.
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
How long do collections accounts stay on your credit report?
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 that time, 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 older 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 them off through the collections agency.
You can try to negotiate a debt settlement or payment arrangement with the 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 balance of your collection accounts. 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 your medical bills have been turned to debt collectors, there are still ways to protect your credit.
“Collection agencies will always work with you if you’re paying them something,” says Randall Yates, CEO of The Lenders Network. “If you work with them, they won’t report it to the consumer 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 they buy, Yates says — you can often work out a settlement for 50-60% or less of the amount they’re asking for. Any compensation over the amount they paid for your debt is a win in their eyes.
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 Consumer Financial Protection Bureau (CFPB), a government agency tasked with protecting consumers from predatory practices, has useful advice for dealing with credit bureaus such as Equifax and Experian, as well as form letters that you can use to contest inaccurate information that is damaging your credit rating.
The CFPB website also has advice on dealing with unfair debt collection practices, making it a useful resource for anyone dealing with debt collectors or a credit bureau.
The best way to deal with 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 healthcare 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.
Here are a few things you can try to get ahead of the game, even if you can’t afford the bill right away.
Work with your health care providers
If you’re facing a big medical bill, most health care providers aren’t looking to throw you to the wolves. They want to help you, but you need to reach out to ask for that help.
If you have health insurance, your insurance company should help you cover most of the cost of health care, but you might still be responsible for deductibles and co-pays. You might also have gotten billed for out-of-network care from a service provider that isn’t part of your insurance.
Ask the billing department at the hospital if you can set up a payment plan or if they can offer any discounts.
If you need help, look for a consumer advocate organization. They work as partners to consumers who need help dealing with medical bills and insurance companies and can share advice on paying for healthcare.
Ask your health insurance company to review the bill
When insurance companies pay a medical bill, you should receive an explanation of benefits that outlines what the insurance company did and did not pay for. If you notice that your insurance provider didn’t pay for certain things, reach out to ask why. You might be able to correct some mistakes, saving you money.
Similarly, if you find mistakes on the bill and the health care provider corrects them, ask the billing office to send an updated bill to your insurance company.
If you can get your insurance provider to cover more of the bill, that can help you avoid missing payments and having a debt collector come after you.
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 settlement expert.