Why Most Medical Debt is Being Removed From Credit Reports
In March 2022, the three major credit bureaus — Equifax, Experian and TransUnion — announced a dramatic (and positive) change to the current medical collection debt reporting. With the Consumer Financial Protection Bureau (CFPB) stating that roughly 20% of U.S. households carry debt related to health care, this news will come as a relief to many. We don’t have long to wait either — the changes started to take effect in July 2022 and will continue into the first half of 2023.
- New changes from the credit bureaus will remove nearly 70% of medical collection debt tradelines from consumer credit reports.
- These changes will give you more time to pay off your medical debts before they show up on your credit report.
- The changes can also improve your credit score by eliminating some medical debt collection accounts from your credit report altogether.
Why are the Credit Bureaus Removing Medical Debt From Credit Reports?
According to the Kaiser Family Foundation, over 90% of the American population has some form of health insurance. Even so, 23 million Americans owe significant medical debt. There are many reasons for this, including high insurance deductibles and unexpected medical bills. Unfortunately, in addition to being a financial burden, medical debt can also hurt your credit report.
To help alleviate this burden, the national credit reporting agencies have created a plan to eliminate nearly 70% of medical collection debt tradelines from consumer credit reports. The changes announced by the three major credit bureaus include:
- Removing paid medical debt from consumers’ credit reports (beginning July 1, 2022).
- Increasing the amount of time before unpaid medical debts in collections will appear on a credit report from six months to one year (beginning July 1, 2022).
- No longer including medical collection debt under at least $500 on credit reports (beginning in the first half of 2023).
By making these changes, the credit bureaus seem to be showing that medical debt should be treated differently than other types of debt. Most types of debt that show up on your credit report are debts that you took on with a purpose. For example, you may have taken out a student loan to help pay for college or a mortgage to buy a house. You may also have credit card debts from credit cards that helped you make a specific purchase. Medical debt is different because it is usually an unexpected debt. It’s not being used to make a purchase or pay for higher education, but rather to help people get life-saving medical care when it’s needed.
How Will the New Changes Impact Your Credit Score?
Fortunately, there are a few ways that these new changes can positively impact your credit score. If you do have medical bills that end up getting sold to a debt collection agency, you’ll have twice as long to settle the debt before it will show up on your credit report. If you’re able to settle the debt within the extended timeframe, it will not be added to your credit report, it won’t have a chance to negatively influence your credit score.
Additionally, these changes will also impact your credit score if you have a collection account on your credit report. Current regulations allow medical debt collection accounts to stay on your credit report for years, even after the debt has been paid off. This can continue to impact some of your credit scores long after the debt has been settled. However, the new changes will allow medical debts to fall off of your credit report after they are paid off. This change will make it easier for your credit score to bounce back quicker from the negative impact of a collection account once the debt is settled.
If you have a smaller medical debt, these changes can also have a positive impact on your credit score. The credit bureaus have agreed not to include medical collection debt under $500 on credit reports, starting in 2023. This could make a big difference for people who may need a little extra time to settle a small, unpaid medical bill.
How Do Unpaid Medical Bills Currently Affect Credit Scores?
Medical debt is a unique type of debt. Health insurance can complicate matters because you often have to wait on the insurance company to approve a claim and pay the medical provider. In some cases, there may be a coding or billing error that results in the approval and payment process taking even longer than usual. The credit bureaus recognize what happens behind the scenes, and that’s why they offer a grace period before medical debt shows up on your credit report.
It’s important to know that medical debt shows up differently on your credit report than other types of debt. When you take out a loan or a line of credit, the creditor reports your account to the credit bureaus and the bureaus add it to your credit report. With medical debt, you owe money directly to your health care provider. Typically, health care providers don’t report to credit bureaus, so unpaid medical bills won’t show up on your credit report right away. However, if you fail to make payments or if the health care provider is not satisfied with the amount of your payments, they may sell the debt to a collection agency. Once this happens, you’ll have a collections account that the agency will likely report to one or more of the credit bureaus.
With the new grace period, the credit bureaus will employ a one-year waiting period before medical debt shows up on your credit report. If you’re unable to settle the medical debt before the waiting period is up, you don’t need to worry about the medical debt affecting your credit score.
However, once a medical debt shows up on your credit report, it can seriously affect your credit score. According to Experian, your payment history accounts for about 35% of your credit score. This makes payment history the single biggest factor affecting your credit score. And when an account has been sent to collections, it means that the medical provider has written off the debt completely, and this can be seen as one of the most serious negative items on a credit report. Since this doesn’t happen right away, it demonstrates that you were unable to make satisfactory payments, resulting in the medical provider selling off your debt.
The grace period is great if you are able to use it to eliminate the medical debt from showing up on your credit report. However, if you’re unable to do that, it’s further evidence of an unsatisfactory payment history. The longer any debt shows a late payment, the worse of an impact it has on your credit score. For example, if you’re 90 days late on payments to an account, this will damage your credit score more than if you were only 30 days late.
Even if you are able to actively make payments on your medical debt, the presence of an account in collections will impact your credit report. When you try to apply for a new credit card, a mortgage or another type of loan, your chance of being approved may be lower because of the collections account. This is especially true if you have more than one account in collections on your credit report.
What Can You Do About Medical Debt?
If you’re currently dealing with medical debt, there are some things that you can do to try to reduce the impact that it can have on your credit score. You can try working with the health care provider to keep the debt from being sold to collections. You might want to try to negotiate with the provider to see if they can lower your bills, or you can try to work out a monthly payment plan. Many healthcare providers are willing to work with you on creating a payment plan and may even offer a reduced rate.
This content provided is for educational and informational purposes only and does not constitute financial or legal advice. RISE is not acting as a credit counseling or repair service, debt consolidation service, or credit services organization in providing this content. RISE makes no representation about the reliability or suitability of the information provided – any action you take based on this content is at your own risk.