Among all the factors that go into creating and maintaining accurate FICO scores, any medical debt you carry may affect your score. A Consumer Financial Protection Bureau study of medical debt suggests that it may be disproportionately affecting credit scores negatively.
Some consumers are unaware they have medical debt in collections until they see their credit reports or receive a call from debt collectors, the agency said. In some instances, a debt may be the result of incorrect billing by medical providers or insurance companies, the study found. The credit scoring models also do not account for the repayment of medical debt in collections, the agency said.
How medical debt works
When you use a medical provider, it will bill you using either an internal or outsourced business management service. If you fail to pay the bill, it is usually first sent to internal collections. If you still don’t pay, the debt often is sold to a third-party debt collector.
In other instances, medical providers immediately sell off their bills, known as “receivables,” to a firm that pays them a discount of the value of the full receivable. Providers do this so that they may have access to cash immediately, rather than wait several months to receive full payment from insurance companies and the patient. Some providers do this immediately, and some wait until the patient is delinquent. The former will net the provider a lot more because the assumption is that the patient will make good on his or her debt.
That purchasing entity is called a “receivables purchaser” that will then take over the collection of the medical debt account. The account is not in collections at that point. It is still considered current, usually for the first 90 days after service.
What the CFPB found about medical debt
If you end up in collections, that bad medical debt is reported to the credit bureaus. The CFPB thinks that because medical debt is different from a credit-originated default, it is paid off differently. As a result, the scoring agencies should account for those unpaid debts in a different manner, the agency said.
The CFPB believes that people with medical debt are more reliable in paying that debt off, behaving in a manner that corresponds with borrowers who have FICO scores that are 10 points higher. Now, 10 points generally may not be a big deal, but if you are a nonprime or near-prime consumer, they may make all the difference in the world.
Protecting yourself by being vigilant
There are several lessons here for consumers. First of all, any time you go for medical care, get a clear understanding of the billing process. It can be very confusing, especially when you’re trying to ignore the pain of your broken leg or gash in your hand.
Ask the medical debt payment specialist in the office for a clear description of what your total bill will be. Make sure the office has your correct and current address. Make sure the staff submits your insurance claim, and if not, make sure you submit the data right away.
Watch for the insurance payments to show up on the bill so they are debited against your medical debt. Pay the balance immediately. If you use a credit card, double check that you write the information on the bill correctly. Verify that the charge appears on your credit card. If you write a check, make sure the check is cashed and download an image from your bank’s website.
Make sure you get a final bill with a zero balance. If this has not occurred within 60 days, call the billing office to get it resolved.
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