How Medical Debt Impacts Your Credit Score

Medical emergencies occur as we go through life. Often, health issues are unexpected and can end up costing thousands of dollars in medical bills. These large medical debts on your credit report can be difficult to pay and debt collectors quickly begin trying to receive payments after the bills pile up.

In the lapse between when you are billed by a medical institution and the time your insurance company pays, the account can also go into collection. Even if you eventually pay the medical bills, the time spent in collection status could significantly lower your credit score. A lower credit score can make renting an apartment, buying a car, or even getting a job more difficult down the road. None of these factors are considered by the credit bureaus when they calculate scores.

The Consumer Financial Protection Bureau has an issue with this practice and thinks medical debts deserve closer consideration. The CFPB conducted a research study and found that people with medical debt generally pay their bills at the same rate as people with higher scores. People who paid off medical debt that wound up in collections were also more likely to repay all other debt, on par with consumers whose credit scores were 16 to 22 points higher.

The Center for Disease Control and Prevention found that one in three Americans have trouble paying their doctors’ bills, making the impact of medical debt a critical concern for the CFPB. This consumer agency has authority over credit bureaus and debt collectors, meaning it can write rules or take legal action against companies that use “unfair” tactics. However, for now, the CFPB is just trying to inform the debate over how medical bills on credit reports should be treated.

It is possible that credit agencies could take it upon themselves to change the system. VantageScore, a small organization, has decided to exclude paid collection accounts from its latest credit scoring model because they found it wasn’t indicative of people’s ability to pay their bills. Fair Isaac Corp (FICO) is also preparing to launch a new scoring model that reduces the weight of medical collections.