Medical debt to come off millions of credit reports

Last week, the three major credit bureaus announced significant changes to how medical debt will affect Americans’ credit scores. On July 1, paid medical collections will disappear from Equifax, Experian and TransUnion credit reports. Previously, these could have remained for up to seven years. Also, unpaid medical collections will not appear on credit reports unless they’ve been in collections for at least a year (up from six months currently). And beginning next year, medical debts under $500 will no longer appear on credit reports.

These are very consumer-friendly developments. About 70 percent of medical debt will be removed from Americans’ credit reports once the aforementioned changes take effect, according to the credit bureaus.

How medical debt affects people

The Consumer Financial Protection Bureau (CFPB) says that 43 million Americans have about $88 billion worth of medical debts on their credit reports. The agency adds that medical debt accounts for 58 percent of bills in collections.

Many people with otherwise sparkling credit records are dragged down by medical debt. Having a debt in collections could easily trim 100 points off a strong credit score. That may not have been fair, explains CFPB director Rohit Chopra.

“In many ways, it’s hard to call medical debt a real debt,” he said. “Few people choose to take on medical debt, and typically, patients have no idea how much they will be charged for a service or a procedure. There’s no upfront disclosure or interest rate to compare. Individuals and families must confront a billing and collections system that can be best described as error-plagued, confusing and labyrinthine.”

To be clear, these changes do not erase medical debt

It’s being treated differently by the credit bureaus, but you’re still responsible for paying it off (assuming the debt’s statute of limitations has not expired).

A good tip is to negotiate a payment plan with the doctor or hospital. Many offer low- or zero-interest financing plans. Nonprofit hospitals are required by law to offer financial assistance or charity care to patients, and more than half of U.S. hospitals qualify as nonprofits. It’s worth a try—the worst they can do is say no.

A personal loan could be a suitable backup plan since those interest rates can be as low as five percent if you have good credit.

Nonprofit credit counseling is another option worth considering. One of the nation’s largest nonprofit credit counseling agencies, Money Management International, offers debt management plans with similar interest rates. An advantage is that you don’t need a top-notch credit score to qualify.

Financing your medical bills with a credit card is probably not a good idea, since the average credit card APR is 16.35 percent.

What else you should know

The credit bureaus’ new ways of reporting medical debt are reminiscent of some other relatively recent changes in the credit reporting industry. Within the past few years, the bureaus removed almost all public records from credit reports. Examples include tax liens and collections resulting from library fines and traffic tickets. Like medical debts, these are often one-off scenarios that don’t follow the same pattern as monthly loan payments.

In other words, your credit score is meant to be a numerical representation of how likely you are to repay a lender. Paying your monthly credit card, car loan or mortgage bill on time feels like a much better apples-to-apples comparison than repaying a medical bill that may have been an isolated event involving a life-or-death situation (and possibly an insurance mix-up as well).

Furthering this idea, lenders and credit bureaus have started to add other financial obligations to some consumers’ credit reports. Experian Boost is one such program that can incorporate utility, telecom and streaming accounts. Buy now, pay later plans are also being added to credit reports. The credit bureaus seem to believe these payment behaviors are more predictive of credit risk than medical debts and traffic tickets.

The bottom line

The new ways of assessing medical debt should lift tens of millions of Americans’ credit scores. It’s always a good idea to check your credit reports regularly to make sure everything is accurate. Especially if you have one of the types of medical debt that should disappear on July 1, make a note to check your credit reports on or shortly after that date.

A good, free resource is AnnualCreditReport.com. It’s providing free weekly reports from all three major bureaus through the end of the year. If anything looks incorrect, file a dispute with each bureau that’s reporting the errant information. Your credit score is one of the most important numbers in your financial life, so it’s important to protect it.