Your medical debt has fallen off your credit report – now what?




Today is a big day in the world of credit scoring. Medical debts that have been paid after being sent to collections come out of credit reports, as do medical collections that are less than a year old.

Medical collections under $500 will also disappear from credit reports early next year, by which time approximately 70% of medical debt in collections will have been eliminated from Americans’ credit reports. according to the Wall Street Journal. In total, the Consumer Financial Protection Bureau reports that 43 million Americans have approximately $88 billion in medical debt on their credit reports.

It’s really a big problem. Traditionally, these debts can weigh on your credit score for seven years. And if a medical collection is the only negative mark on your credit reports, it could lower your credit scores by 100 points or more. Once removed, your score could improve by leaps and bounds. If you have other blemishes, however, removing a medical collection probably won’t be as important.

It’s always a good idea to check your credit reports regularly. A great resource is AnnualCreditReport.com. This is a government-backed website that offers Americans free weekly access to their Experian, Equifax, and TransUnion credit reports through the end of 2022.

Especially if you’ve ever had medical debt on your credit reports, I suggest you check again now. Medical collections you paid for and medical collections less than a year old should have automatically disappeared from July 1, so if they are still there, I suggest filing a dispute with each office that displays incorrect information.

If you want to see your credit score, not just the underlying reports, organizations like Experian and Discover provide free access to all Americans.

How to keep building your credit

If you’ve seen your credit score go up, you might be motivated to keep the momentum going. And if your score still needs work, that’s all the more important. The lower your credit score, the more likely you are to be denied loans and lines of credit. Even if you are approved, you will likely pay much higher interest rates.

Many of the best tactics for improving your credit score are more of a marathon than a sprint. Aim to pay all your bills on time, reduce your debts, and show that you can successfully manage various types of credit over the long term. Still, there are things you can do quickly.

My favorite is to lower your credit utilization rate if you can. It’s the credit you use divided by the credit you have, especially on revolving accounts like credit cards. There’s no magic number, but a single-digit percentage is best (load less than $1,000 per month on a card with a $10,000 limit, for example).

Most people don’t realize that it’s usually reported on your statement date, so even if you pay in full (a great practice to avoid interest), you could still have a high usage rate. Potential solutions include making extra payments throughout the month, reducing the balance even before the statement is released, or requesting a higher credit limit.

Another good tactic is to sign up for an alternative credit scoring system like Experian Boost. It can improve your credit score by rewarding one-time utility, telecom, and streaming payments that haven’t traditionally factored into the credit score.

You might also consider asking a parent or other trusted person to add you to one of their credit card accounts as an authorized user. As long as they use the card responsibly, this positive behavior can also improve your credit score.

Note that your medical debt can come and go

I recently received an email from a reader that helps illustrate some interesting nuances regarding how credit bureaus handle medical debt. This reader, Mona, told me she had a $356 dental bill in her collection. She is unhappy with the dentist’s work and does not want to pay the bill. His credit score went from 803 to 681. That’s a big shot from exceptional to barely above the “good” credit line.

Mona was thrilled to hear that medical collections under $500 will be removed from credit reports in early 2023. She was even more thrilled to learn that collections less than a year old will be removed by then. The countdown begins on the date of the first delinquency, which in her case was October 2021. This collection should be off her credit reports starting today, July 1, because she is less than a year old. year.

However, in a few months, it may return to reporting once it hits the year mark. Then it should go away permanently in early 2023 once amounts below $500 are removed. While Mona is thrilled that her credit score will soon go up, I reminded her that the new ways the credit bureaus are looking at medical debt aren’t making it go away. She can still be harassed by collection agencies and potentially sued (although I don’t think that’s particularly likely in her case since she owes a relatively small amount).

The biggest problem is that while $356 isn’t change, it’s nothing compared to what a reduced credit score can cost someone in the long run. If Mona was in the market for a mortgage, say, with a credit score of 681 versus 803, the difference would be astronomical. The median credit score for a newly originated mortgage in the first quarter of 2022 was 776, according to the New York Fedso someone with a credit score of 681 might not even be approved.

If we assume that this borrower with a credit score of 681 could be approved for a 30-year fixed rate mortgage, a good rate these days would probably be around 5.5%. This compares to around 5% for someone with a credit score in the mid-700s or higher. On a loan of $300,000, the most creditworthy borrower would pay $1,610 per month in principal and interest. At 5.5%, that jumps to $1,703 per month. Over 30 years, that’s a difference of $33,480!

Mona tells me she’s not in the market for a loan anytime soon and would rather get away with it, but for many people paying a medical collection of $356 would be worth it for the benefits of the credit rating and to keep debt collectors away from your debt. return.

How to avoid future medical debt

Unlike most other debt, medical debt is usually not a conscious choice. It is often the result of an unexpected or even life-threatening condition. There’s not much you can do to protect yourself. Ensuring that you have adequate insurance coverage is a good start, but even then you are sometimes forced to pay significant fees.

One thing you can do is do some research before scheduling a procedure. Wherever possible, research doctors in the network and compare the disbursements charged by different practitioners. Costs can vary greatly; MRIs, for example, can range from $400 to $3,500.

Also consider asking the doctor or hospital for a payment plan. Many offer patients low-interest or interest-free financing for several years. Sometimes they even forgive part or all of the costs through charitable care programs. The worst they can do is say no. It is best to start with this approach before considering alternatives.

If you have a good credit rating, you may qualify for a personal loan rate as low as around 6%. Some credit cards offer 0% APR introductory periods for up to 21 months, but be careful. The regular interest rate kicks in after the 0% period ends, and the average credit card APR is nearly 17%. A debt management plan offered by a reputable non-profit credit counseling agency such as Money Management International is often a better option.

The bottom line

Recent changes to how credit bureaus handle medical debt are expected to improve the credit scores of tens of millions of Americans. Keep a close eye on your credit scores and practice strong credit fundamentals to take care of your credit score, which is one of the most important numbers in your financial life.

Have a question about credit cards? Email me at [email protected] and I’d be happy to help.

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