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Should the Credit Rating Agencies Treat Medical Debt Differently?

June 9, 2014
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Getting seriously hurt or sick can turn your life upside down. But many people are surprised to discover that, long after they’ve healed, the effects of a long hospital stay linger in their credit.

Legislators and consumer groups are urging the credit rating agencies to treat medical bills differently from other debts, but why? Take a look at the details below.

Unpaid medical bills affect your credit in a big way

Your health care provider is probably serious about keeping your body healthy, but they may not be equally concerned about the welfare of your credit. Contrary to popular belief, your doctor’s office will take action if you fail to pay your bill.

First, your medical provider’s office will likely make a few attempts to get you to pay a bill you’ve neglected. If you don’t cough up the cash or work out some kind of payment plan, eventually they’ll attempt to cut their losses by selling the debt to a collector. At this point, the account will show up on your credit report as being in collections.

This will cost you a lot of points on your credit score, especially if your score was high to begin with. What’s more, an account in collections could affect your credit for up to seven years.

In many key ways, medical bills are different

The series of events described above might sound familiar to you – after all, they’re very similar to the steps taken by lenders if you don’t pay on another type of loan. An unpaid bill is an unpaid bill – why is there a push to treat it differently from other debts?

Advocates argue that medical bills are different from other debts, chiefly because:

They’re potentially crippling – According to a NerdWallet analysis, 3 out of 5 bankruptcies in 2013 were due to medical debts.

They’re confusing – If you have health insurance, receiving a medical bill can be confusing. It’s sometimes hard to decipher what you owe and what the insurance company is going to cover. This lack of clarity often leads people to hold off on paying for a long time – long enough to get sent to collections.

They might end up in collections faster – Lenders usually only send your account to collections after multiple attempts to work with you, but many medical offices aren’t as generous. But according to an expert quoted in the New York Times, hospitals commonly send accounts to collectors after just one late payment.

They’re poor predictors of risk – In 2014, the Consumer Financial Protection Bureau (CFPB) reported on the outcome of a study it conducted between September 2011 and September 2013. According to the CFPB’s website:

“The study found that consumers with medical debt generally paid back their loans or bills on par with consumers with scores about 10 points higher.”


“The study found that consumers who subsequently paid medical debt that had gone into collections were more likely to pay back their debts, on par with consumers with scores 16 to 22 points higher.”

This implies that a consumer’s history with paying medical bills might not be a good data point for the credit rating agencies to use when determining credit scores.

They can be tough to avoid – Consumers have almost no control over the cost of medical care, and very little direct control over whether they need treatment. In other words, people dealing with medical debt aren’t carelessly overextending themselves. As a result, incorporating medical debts into judgments of creditworthiness may be unfair.

How to keep an illness or injury from sickening your credit

For the time being, the credit rating agencies are going to keep treating medical debts just like any other. To keep doctors’ bills from sickening your credit, follow these tips:

  • Get health insurance – The cost of medical treatment can add up fast. Without insurance, it’s easy to get in over your head. Check out our resource for finding affordable care.
  • Be diligent about answering the phone and checking your mailbox – If you’re recovering from an illness or injury, you should expect some communication from your insurer and health care provider about the bill. Even if it’s tough, answer the phone and check your mail. This will keep you aware about what you owe and to whom.
  • Communicate with your doctor’s office – It’s tempting to bury your head in the sand when you’re overwhelmed by what you owe. But staying in regular contact with your doctor’s office might make them less likely to send your bill to collections.
  • Consider striking a deal – If you can’t pay a medical bill in full, negotiating a deal with your health care provider could be your best bet. Working out a payment plan might be possible, and some offices may agree to settle the bill for less than you owe.

If you do make a deal, be sure to get it in writing. Mistakes happen, and if you end up in collections you’ll need proof that you met your end of the bargain.

The bottom line: Getting sick is scary, but what an unpaid hospital bill does to your credit can make things worse. As the debate over reforms continues, use the Nerds’ tips for keeping your credit in good health.

Medical bill image via Shutterstock