Impact of Medical Debt on Credit Score and Solutions to Address It
In the present day healthcare system, even a short hospital stay can lead to a towering pile of medical bills. Unfortunately, insurance doesn't always cover everything, or anything at all, leaving millions of Americans grappling with unexpected medical debts. Roughly 1 in 12 adults were indebted for medical expenses in 2024, as per the Survey of Income and Program Participation (SIPP) survey.
This type of debt can have lasting repercussions that extend beyond just the financial strain. Medical debts tend to accumulate during critical times - following an accident, illness, or surgery - making individuals emotionally shaken and financially vulnerable. When these bills remain unpaid, the stress can escalate as collections calls start and credit scores begin to slip. For most, this debt is a result of essential care expenses, not overspending or poor budgeting.
Fortunately, recent improvements in credit reporting guidelines and debt relief programs offer some relief for many patients. Yet, it's crucial to comprehend how medical debt affects your credit and the steps you can take to safeguard yourself.
The Impact of Medical Debt on Your Credit
Historically, medical debt was a swift route to damaging credit scores. Even minor unpaid bills could land in collections and drag down your credit score for extended periods. However, recently, the three major credit bureaus - Experian, TransUnion, and Equifax - have adjusted their handling of medical debt. Below are the significant changes enacted:
- Removal of Paid Medical Collections from Credit Reports: Previously, once medical debt was settled or paid off, it would still affect credit scores. But with the recent update, paid medical collections should no longer harm your credit standing, even after they go to collections.
- One-Year Waiting Period: Medical bills sent to collections will not be reflected on your credit report for 12 months, giving you time to resolve the debt or negotiate a payment plan.
- Exclusion of Smaller Debts: Medical collections under $500 are no longer reported on credit reports at all.
These reforms mean that unpaid medical bills may not damage your credit score as rapidly or as severely as they once did. Nevertheless, if a substantial medical balance remains unresolved for an extended period, it may appear on your report, lowering your credit score, especially if you delay taking action during that one-year grace period.
It's essential to remember that while medical debt is treated differently than credit card or loan debt, lenders may not always distinguish between the two. Any collection on your credit report can affect your ability to secure loans, rent an apartment, or obtain specific jobs.
Addressing Medical Debt
If you're struggling with medical debt, there are options to help you navigate your way to financial stability. Taking prompt action can prevent collections and limit the potential harm to your credit score. Here are some practical strategies:
Review and Negotiate Your Bills
Start by thoroughly examining each bill for errors or duplicate charges. Surprisingly, medical billing mistakes are quite common. If something doesn't appear right, call the provider or hospital's billing department and request an itemized statement.
Once you've verified the charges, see if the provider is willing to negotiate. Many providers are open to offering discounts for prompt payments, setting up interest-free payment plans, or even reducing what you owe if you demonstrate financial distress.
Apply for Financial Assistance
Nonprofit hospitals are obligated by law to offer financial aid programs to eligible patients. If you're low-income or facing financial difficulties, you might qualify for partial or total debt forgiveness, even if the bill has already gone to collections. Request an application from your provider's billing office.
Consider a Debt Relief Program
If your medical debt is substantial or you're juggling multiple forms of unsecured debt, a debt relief program, such as debt settlement, may be worth exploring. Debt settlement programs aim to negotiate with your creditors to reduce your debts. There are also consolidation programs that gather your debts into a single monthly payment, making them easier to manage.
Keep in mind that while debt settlement can help resolve medical collections, it comes with potential risks, such as fees, tax implications, and temporary credit score drops, so it's essential to work with a reputable service provider and be aware of the trade-offs.
Monitor Your Credit
Your credit report should reflect any paid or settled medical debts accurately. However, errors might still occur. Ensure that no incorrect medical collections are listed by checking your credit report routinely. If you spot an error, dispute it directly with the credit bureau.
In Summary
Medical debt can seem overwhelming and unfair, often catching you off guard during your most challenging times. While it has the potential to hurt your credit, recent changes in credit reporting have provided more wiggle room. However, prompt and proactive action remains crucial. From negotiating with providers to seeking financial aid or working with a debt relief program, there are ways to deal with medical debt without jeopardizing your financial future. Take action before the bills end up on your credit report and compound the problem.
Angelica Leicht, ourNews.com's Senior Editor for the Managing Your Money section, writes and edits articles on diverse personal finance topics. Before joining us, she held various editing roles at The Simple Dollar, Interest, HousingWire, and other financial publications.
[1] Federal Register Vol. 85, No. 43 (February 27, 2020)[2] California Health & Safety Code §1278.533(a)(2)[3] National Conference of State Legislatures - Medical Debt Basics (February 11, 2021)[4] The New York Times - A Radical Plan to Erase Medical Debt (December 29, 2021)
- The recent updates in credit reporting guidelines have made a significant difference for many patients, as paid medical collections should no longer harm credit standing, even after they go to collections.
- Medical bills sent to collections will not be reflected on your credit report for 12 months, providing an opportunity for individuals to resolve the debt or negotiate a payment plan before the collections appear on their credit report.
- The three major credit bureaus - Experian, TransUnion, and Equifax - have also excluded medical collections under $500 from being reported on credit reports, thus reducing the impact of small medical debts on one's credit score.
- While medical debt is treated differently than credit card or loan debt, any collection on your credit report can affect your ability to secure loans, rent an apartment, or obtain specific jobs, highlighting the importance of addressing medical debt promptly.
