If you want to keep your credit rating strong, you might want to stay away from a hospital or other medical facility. Even if you have good insurance or can pay for any illnesses or emergencies that arise, you could wind up with a collection account on your credit reports, and your credit scores could tank as a result.
Think it can’t happen to you? Think again.
According to research by The Commonwealth Fund, some 30 million Americans were contacted by collection agencies in 2010 over unpaid medical bills. And previous research from the Federal Reserve found that over half of all collection accounts on credit reports are related to medical bills.
Here are four common misconceptions about medical bills that can cost you dearly:
Myth 1: As long as I am making payments on a medical bill, it can’t be sent to collections.
The Truth: Making payments on a medical bill doesn’t necessarily keep it out of collections. If you making small payments, or if you make your payment a few days late when you are under a payment arrangement, you may discover the provider has turned the bill over to collections.
And consumer protections are few and far between. In California, hospitals are required to give patients a 150-day period during which they can negotiate their hospital payments before their medical bills are sent to collections agencies, according to Families USA. And in Minnesota, the group says, there is a clear process for “patients to dispute or challenge bills from hospitals or clinics, and no judgments may be made against patients until they are given a fair chance to respond.” New protections under the Affordable Care Act give patients at non-profit hospitals time to apply for financial assistance before any “extraordinary collection measures” are taken. But for the most part, any unpaid balance is fair game.
Myth 2: I have to be notified before a medical bill is turned over for collections.
The Truth: You may not even know there is unpaid medical bill until you get a call or letter from a collection agency. At that point, it may be too late to avoid damage to your credit. Bills fall through the cracks, are sent to the wrong address, or are sometimes not sent to the patient before they are turned over to collections. And when that happens, tough luck.
While some collection agencies will agree not to report medical collection accounts that are paid off immediately, others refuse to do so. And some bill collectors will use the threat of credit report damage to try to get patients to pay up, even if the bill itself is disputed.
Myth 3: Medical collection accounts are treated differently than other types of collection accounts when credit scores are calculated.
The Truth: Medical providers, such as doctors and hospitals, don’t typically report medical bills. In fact, these bills generally don’t show up on credit reports unless they are sent to collection agencies, which often do report them. And at that point, there is no distinction between medical collections and other collection accounts. “When a medical debt is outsourced to a third-party collection agency, it is treated the same as other debts that are in collection,” says Jeff Richardson, vice president of public relations for VantageScore Solutions.
FICO’s policy is similar: it does not distinguish between medical and non-medical collection accounts when calculating credit scores. In an Associated Press article, a FICO spokesperson noted that a single collection account could cause a 780 FICO score to drop by 105 – 125 points. That’s enough to bump someone from a “prime” score to an “off-prime” or even “subprime” score.
Myth 4: To clean up my credit, I need to pay off medical collection accounts.
The Truth: Go ahead and pay those medical collection accounts if you owe them, but don’t expect dramatic changes to your credit scores. The fact is, collection accounts hurt your credit scores and that’s generally true whether they are paid or unpaid, though some models may favor collection accounts that have been satisfied. “Collection accounts of lower than $250, or ones that have been settled, have less impact on a consumer’s VantageScore,” says Richardson. And the most recent FICO scoring model ignores collection accounts where the original balance is less than $100. Notably, most mortgage lenders use an older FICO model when evaluating applications for home loans.
Mark Rukavina, executive director of The Access Project asks, “What do you get when you combine a dysfunctional insurance billing system with these flawed scoring algorithms? The answer (could be) $5,000 to $6,000 in additional fees for a home mortgage!”
Eventually all collections are removed from credit reports. Under federal law, they may not be reported seven years and 180 days from the date the consumer first fell behind on the original bill, regardless of whether the account has been paid or settled.
Is there any benefit to paying off a medical collection account, then? Potentially, yes. You may avoid a potential lawsuit over the debt. If you lose, the creditor will get a judgment against you, and that judgment will add a new negative item on your credit reports.
Note that newer models of VantageScore and FICO credit scores will ignore paid collection accounts. Learn more.
Is Relief in Sight?
Senator Jeff Merkley (D-OR) has reintroduced the Medical Debt Responsibility Act which will prohibit consumer credit agencies from using paid off or settled medical debt collections in assessing a consumer’s credit worthiness. In addition, the bill will require the creditor or credit rating agency to expunge the medical debt from the consumer’s record within 45 days from the day it is paid off or settled. Along with Durbin, the bill is cosponsored by Senators Sherrod Brown (D-OH), Chuck Schumer (D-NY), Tom Harkin (D-IA), and Bob Menendez (D-NJ).
Groups as diverse as Consumers Union and the American Collectors Collectors Association support the bill.
“Consumers do not choose medical bills for illness or accidents or medical billing errors, but these small bills can end up on their credit reports and can financially devastate them at absolutely no fault of their own,” says Rodney Anderson, executive director of Supreme Lending and author of Credit 911, and a champion of the Medical Debt Responsibility Act. “Imagine a billing error ruins your opportunity to buy your home. It’s not like another bill. If we don’t pay our mortgage on time, we pay with a late fee. But with medical bills we often don’t hear about them (until they are in collections) because the insurance companies are still in dispute with the medical provider.”
Rukavina insists the system needs to change: “Someone who has a 780 credit score is not a deadbeat, but they could be seriously affected by a single unpaid medical bill. This cries out for Congress to pass the Medical Debt Responsibility Act as soon as possible.”
If you’re concerned about how your medical debt could be impacting your credit, you can check your three credit reports for free once a year. If you’d like to monitor your credit more regularly, Credit.com’s free Credit Report Card provides you with an easy to understand breakdown of the information in your credit report using letter grades, along with two free credit scores that are updated monthly.
More on Managing Debt:
- How to Pay Off Credit Card Debt
- Understanding Your Debt Collection Rights
- Top 10 Debt Collection Rights
Editor’s Note: This story was updated on Aug. 25, 2015, to reflect changes in how collection accounts are considered in newer credit scoring models.