Medical debt is an issue that many people face, often unexpectedly and unprepared. A sudden illness or accident can result in substantial medical expenses, and if these bills are not paid on time, they can be sent to collections. This situation can significantly affect one’s financial health, particularly their credit score. In this article, we will delve into how medical collections affect your credit score and what steps you can take to mitigate these effects.
Medical debt can be an overwhelming burden for many individuals and families. When medical bills go unpaid, they can quickly move from an annoyance to a severe financial problem, especially when they end up in collections. The economic impact of having medical collections on your credit report can be profound and long-lasting. Many people often ask, “do medical bills affect your credit?” The answer is yes, they do, and understanding how they do is crucial for managing and improving your financial health.
The Mechanics of Credit Scores
You need to understand how credit scores work in order to understand how medical collections affect them. Let me explain. A credit score, also known as a FICO score, is a three-digit number that quantifies your credit risk. There are two major classifications of credit scores: the FICO score and the VantageScore. These scores vary from 300 to 850, with a high score depicting an individual’s high creditworthiness.
Credit scores are calculated using several factors, including payment history, outstanding balance, length of credit history, credit utilization, and number of new accounts. Payment history is the most significant component, taking approximately 35% of the FICO score. It is here that medical collections appear.
Let’s break down these components further:
- Payment History: This records your payments on all credit accounts, including credit cards, mortgages, and loans. Late payments, defaults, and collections will negatively affect this aspect of your score. Medical collections fall into this category and can severely impact your score if not addressed promptly.
- Outstanding Balance: This refers to the total amount of debt you owe. High balances relative to your credit limits can lower your credit score. Medical debt that goes to collections adds to your outstanding balances and can lower your score.
- Length of Credit History: This is the duration of your credit accounts. A more extended credit history is generally better for your score, as it shows a track record of managing credit responsibly. However, a new medical collection can still impact your score negatively, regardless of your credit history.
- Credit Utilization: This is the ratio of your current credit card balances to your credit limits. Lower credit utilization ratios are better for your score. However, medical collections are not included in credit utilization calculations; having them can indicate poor financial health, which might indirectly affect lenders’ perception of your creditworthiness.
- New Accounts: Quickly opening several new credit accounts can indicate risk and lower your score. If you’re opening new accounts to manage or pay off medical debt, this could also negatively impact your credit score.
How Medical Collections Affect Your Credit Score
Medical collections occur when a patient fails to clear his/her medical bill within 90–180 days, and the healthcare provider forwards the amount to a collection agency. When a debt goes to collections, the credit bureaus are informed of the debt, which is included in your credit report. An instalment collection account can significantly bring down your credit score somewhere between 100 and 140 points, depending on the rest of your credit history.
Some diversions are made in medical collections compared to other collections. This is because the scoring models used in credit reporting bureaus have altered how medical collections affect consumer credit scores compared to different types of debts; there has been a change in laws that protect consumers—for example, FICO 9 and VantageScore 4.
One model pays less attention to the medical collections, while the other must consider paid medical collections. Moreover, the time it takes for overdue and unpaid medical expenses to be reported to the credit bureaus is relatively longer than that of other types of debts, thus giving consumers more time to address their bills.
Nevertheless, even with these protections, medical collections can still damage your credit and render it almost impossible to obtain credit, loans, or favourable interest rates. They also influence other areas of your financial life, like when you are looking for an apartment to rent or even the job you are applying for.
Minimizing the Effects of Medical Collections
If you face medical collection on your credit profile, you can manage this. First of all, the debt must be paid off, which is still possible even if it takes some time. Once the debt is paid, you can ask the collection agency to delete the account from your credit report, often called ‘pay for delete.’ The agencies don’t need to agree to it, but it does not hurt to try.
The third course of action could be to challenge the medical collection. If you think it was collected in its entirety or part, in error, for example, if it was collected for the wrong amount or if the debt needed to be legitimate, you can dispute this credit collection with the credit bureaus. The bureaus must undertake follow-up and clarification to ensure that all the information provided and processed is accurate.
Also, new measures and scoring criteria are constantly introduced to offer more fairness to consumers. For instance, the National Consumer Assistance Plan developed by the three leading credit bureaus has facilitated solving problems with medical collections on credit reports.
Conclusion
Medical collections are one of the most significant factors affecting your credit score, depending on the amount and procedures used to collect it. Still, with the help of this article, you will be informed of different ways to manage the debt.
Overall, medical bills impact your credit, but the right decisions and measures can be taken to ensure your credit remains secure and healthy. It is also important to note that one should not let the medical bills go to the collection in the first place by contacting the healthcare providers or insurance companies, and it is necessary to know the rights and possibilities regarding medical collection.