When it comes to managing personal finances, one area that often gets overlooked is the impact of medical bills on your credit score. Many people are unaware that unpaid medical bills can have far-reaching consequences on their creditworthiness, making an understanding of this topic incredibly valuable. In this blog post, we’ll dive deep into how medical bills can affect your credit score, ways to mitigate the damage, and steps you can take to maintain a healthy financial profile despite mounting healthcare expenses.
Why Medical Bills Matter
Healthcare expenses can be exorbitant, especially in the United States, where medical costs are among the highest in the world. According to a study by the Journal of Medical Association (JAMA), approximately 17.8% of Americans have medical debt in collections. These debts can arise from a myriad of situations, including unexpected emergencies, chronic illnesses, or even simple medical procedures. Unfortunately, if left unpaid, these bills can land in collections, where they can then be reported to credit bureaus.
Once these unpaid bills are reported to the credit bureaus, they impact your credit score just like any other unpaid debt. Medical debts are typically less damaging than other types of debt like credit card bills or mortgage payments, but they still carry a significant punch. The key takeaway here is that medical bills, when neglected, can and will impact your financial health in adverse ways.
Medical Bills and Your Credit Score
When we talk about credit scores, we usually refer to the FICO score, the most commonly used credit scoring model. FICO scores range from 300 to 850, with higher scores indicating better credit health. Your credit score is determined by a combination of factors, including payment history, credit utilization, length of credit history, types of credit, and new credit inquiries.
Medical bills primarily affect your payment history, which accounts for 35% of your FICO score. When a medical bill goes unpaid, it often gets sold to a collections agency. This collections account then shows up on your credit report, dragging down your score. According to FICO, a collections account can drop your score by 50 to 100 points, a significant decline that could take years to recover from.
It’s important to note that the three major credit bureaus—Experian, Equifax, and TransUnion—have made some changes in recent years to mitigate the impact of medical debt on credit scores. For instance, they no longer count medical debt in collections if it is paid off. Additionally, there is a 180-day waiting period before medical debt shows up on your credit report, allowing time to resolve insurance issues or negotiate with healthcare providers.
How to Prevent Medical Bills from Hurting Your Credit
The best way to protect your credit score from medical bills is by being proactive. Here are some strategies to consider:
Understand Your Insurance
Make sure you thoroughly understand your health insurance policy, including what it covers and what it doesn’t. Always verify with your healthcare provider and insurance company before undergoing any major procedures. This can help you avoid unexpected bills that you may be unable to pay.
Negotiate with Healthcare Providers
If you receive a medical bill that you cannot afford, don’t hesitate to discuss it with your healthcare provider. Many hospitals and clinics have financial assistance programs or can arrange payment plans that make it easier to manage your debt. Some institutions also offer discounts for paying your bill in full or setting up an automatic payment plan.
Utilize Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)
These accounts allow you to set aside pre-tax money for medical expenses, making it easier to cover unexpected costs without taking a hit on your credit score. HSAs are particularly beneficial if you have a high-deductible health plan because the unused funds roll over year to year.
Stay Organized
Keep meticulous records of all your medical bills, insurance statements, and payments. Having organized paperwork makes it easier to quickly identify any errors or discrepancies and resolve them promptly. This can save you from unnecessary stress and financial strain.
Steps to Recover if Your Credit Score is Already Hit
If your credit score has already taken a hit from medical bills, don’t despair. There are several steps you can take to repair your credit:
Dispute Errors
If you find any inaccuracies in your medical bills or discover that paid bills are still being reported as unpaid, dispute the errors with the credit bureaus. Providing timely and accurate documentation can result in these negative marks being removed from your credit report.
Set Up a Payment Plan
Even if the bill has gone to collections, you can often negotiate a payment plan with the collections agency. Many agencies are willing to work with you, allowing you to pay off the debt in manageable installments. Some may even agree to remove the collections account from your report once the debt is settled.
Focus on Other Aspects of Your Credit
Improve your credit utilization ratio by paying down high balances on credit cards. Be sure to make all of your existing loan and credit card payments on time. These actions can help to offset the negative impact of the medical debt on your overall credit score.
Consult a Credit Counselor
A certified credit counselor can provide you with personalized advice and strategies for managing your debts. They can also negotiate on your behalf with creditors to establish more favorable payment terms.
The Future of Medical Debt Reporting
Change is on the horizon when it comes to how medical debt affects your credit score. Legislation has been proposed to further cushion the impact of medical expenses on credit reports. Some states have also introduced laws to increase transparency and fair practices within the healthcare billing industry.
Additionally, the FICO and VantageScore models are continually evolving to better reflect consumers’ true credit risk, acknowledging that medical debt differs fundamentally from other forms of debt. These advancements could mean less severe impacts on your credit score in the future, albeit it’s crucial to stay updated on these changes.
While we navigate the murky waters of medical expenses, understanding the link between medical bills and your credit score empowers you to take control of your financial well-being. By being proactive and using the strategies discussed above, you can mitigate the adverse effects and maintain a healthier credit profile in the face of rising healthcare costs.
