Millions of Americans have medical debt that hurts their credit. The Consumer Financial Protection Bureau estimated it was 43 million people, according to data released in late 2014.
Now relief may be on the way.
Changes in how credit reporting agencies report and assess medical debt are underway. They should reduce some of the painful financial consequences of having a health care problem.
Starting Sept. 15, the three major credit reporting agencies — Experian, Equifax and TransUnion — will establish a 180-day waiting period before including medical debt on a consumer’s credit report. The six-month period is intended to ensure that there is sufficient time to resolve disputes with insurers and late payments.
Additionally, credit bureaus will remove medical debt from consumer credit reports once it is paid by an insurer. Some credit scoring models do not penalize paid medical debt from any source.
The changes are the result of two efforts by states to help consumers: a settlement negotiated in 2015 by New York State Attorney General Eric Schneiderman and the three major credit reporting agencies, and a agreement soon after between the agencies and 31 other state attorneys general. The changes will be implemented nationwide.
For many consumers, an unexpected healthcare calamity can quickly turn into a financial calamity. Just over half of all debt that appears on credit reports is related to medical expenses, the CFPB found in its 2014 study. For 15 million consumers, medical debt was the only blot on their credit history. credit.
This is perhaps unsurprising given the growth in the number of people with high-deductible health insurance plans and large health care financial responsibilities, says Chad Mulvany, director of policy at the Healthcare Financial Management Association, a membership organization for finance professionals.
“More people who would normally have been a good credit risk are now saddled with big bills,” he says.
The 180-day waiting period is “a big step toward a fairer process,” says Julie Kalkowski, executive director of the Financial Hope Collaborative at Creighton University in Omaha, Neb., which offers financial education and coaching for low-income people, single mothers.
Rather than trying to collect unpaid medical bills themselves, hospitals and medical practices typically hire collection agencies to seek out payments. But when providers take this step varies widely.
“Without a standardized process, some invoices are sent to collections because they are 30 or 60 days late, instead of six months,” Kalkowski says, citing several of the women who have gone through the Creighton program. The total amount owed in most cases was less than $150, she said.
In fact, the average amount of medical debt in collection was $579, compared to $1,000 for non-medical debt, the CFPB found in its study. But even small amounts of debt can lead to credit problems. A bad credit score can prevent someone from getting a car loan, credit card or mortgage, for example.
Lenders use credit reports and credit scores to assess the risk of someone defaulting on a loan. Credit reporting companies create algorithms that use data from people’s credit reports to assign a three-digit credit score, usually between 300 and 850, which summarizes a person’s credit risk based on the information contained in a credit report at that time. Higher scores indicate lower risk.
Credit reporting companies like FICO and VantageScore have adjusted their formulas to account for the fact that medical debt is not necessarily an accurate indicator of whether someone is a good credit risk.
“Those with medical accounts are less likely to default on their accounts than non-medical accounts,” says Ethan Dornhelm, vice president of scores and analytics at FICO.
To solve this problem, the new FICO and VantageScore models differentiate between medical and non-medical debt. People with medical debt in collections receive a lesser penalty than those with non-medical collections, says Sarah Davies, senior vice president at VantageScore Solutions.
According to FICO9, the most recent model, someone whose only major credit stain is one or more medical collections would see their median score improve by about 25 points over the older versions, says FICO’s Dornhelm.
But there’s a catch: Many banks and other lenders haven’t yet adopted the new versions of credit scoring models. So while medical debt shouldn’t have such a strong impact on a person’s credit score currently, in many cases it still could.
What should a consumer do? You can’t control the scoring model a lender uses, but you can check your credit report regularly to make sure it’s accurate. Consumers are entitled to a free credit report from each credit reporting company each year.
“If there’s a medical debt that’s been paid, it should be removed in the future, and if it’s less than six months old, find out when it’s going to be removed,” VantageScore’s Davies advises.
Kaiser Health News is an editorially independent news service that is part of the nonpartisan Henry J. Kaiser Family Foundation. To follow Michelle Andrews on Twitter @mandrews110.
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