It’s high time to explore the impact of medical debt on consumer credit reports and consumer credit scores. On the surface, medical debt is not that different than any other type of unsecured consumer debt. It’s statutorily dischargeable in bankruptcy, can end up on your credit reports, and can have a negative impact on your credit scores.
What Makes Medical Debt Different
That being said, that’s where the similarities end. Medical debt, unlike most other consumer debts, is not usually reported to the credit reporting agencies like, say, a credit card account or a mortgage is reported. Also, most medical service providers don’t want to set up payment plans with their patients. You’ve probably seen the ubiquitous sign at most doctor’s offices that reads, “Payment in Full is Due When Services Are Rendered.” That doesn’t mean, “We Extend Credit!!”
Although, just because medical debt isn’t typically reported to the credit bureaus, doesn’t mean it won’t show up on your credit reports, either. If you won’t or can’t pay your medical bills, the service providers will spend a few months trying to convince you to pay by sending statements and past due notices. It’s important to keep in mind that their core competency is being a doctor, not a bill collector.
After a few months of unsuccessful collection efforts, the service provider is simply going to outsource the debt to a 3rd party debt collector. And, yes, the debt collector will likely report the debt to the three credit reporting agencies. The negative information will remain on your credit reports for seven years from the date the original debt went into default.
The impact of a medical collection on your credit reports is no different than any other type of collection. And this negative information is just as damaging to your credit scores as a credit card collection and other types of traditional consumer debt collections. When medical collections are paid or settled, they are not removed from your credit reports, as some would have you believe.
In FICO’s latest generation of credit risk scoring models, informally known as “FICO 08”, there is a tiny bit of help, but only for consumers who have original collection balances of less than $100. In these small-dollar cases, the FICO score ignores the collection account. This would likely only apply if the consumer’s medical coverage paid an overwhelming majority of the expense or if the consumer wrote a bad check for the deductible.
The Impact, Quantified
While it’s impossible to know the exact impact of a medical collection to your FICO scores, I ran a similar scenario on my personal credit report at myFICO.com to test the outcome. My 805 credit score turned into a less-than-impressive 650-695. This would be the same impact regardless of the type of collection, but there’s something important to consider when you’re thinking about my personal scenario.
Most consumers who have collections from defaulted credit cards, broken apartment leases, or other types of delinquencies, have other negative credit information weighing down their scores. Consumers who have medical collections might otherwise have perfect credit reports.
Many medical collections are the result of billing errors or insurance processing snafus and not because of a consumer’s inability or unwillingness to pay. These medical collections are a surprise and not something the consumer is expecting.
Finally, the damage to their good credit scores is going to be significant, when compared to the damage suffered by someone else who already has unrelated derogatory credit information. Credit scores tend to take the path of least resistance, which means it’s easier to turn an 800 into a 650, than it is to turn a 650 into a 450.
Getting Them Removed is Next to Impossible
It would be insulting to simply suggest that you “avoid” medical collections, given that most of us do so already. However, there are scenarios where we know a collection is imminent, and then do nothing to avoid it.
In my 20+ years in the credit industry, I’ve spoken to countless consumers who have medical collections and it’s shocking how many of them knew of an insurance processing or billing error and simply conceded and said they’ll take care of it, only to learn that they (sic) didn’t and now there’s this isolated collection on their credit reports.
Collections are very difficult to get off of your credit reports. In fact, the only way to get them removed is if the original merchant withdraws them or they’ve been filed erroneously. While there are rumors of “pay for delete” deals cut by collection agencies, the credit bureaus make it very clear in their agreements with collection agencies that they are not to remove collections simply because they’re paid. And, doing so could cost them their service agreement with the credit bureaus.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.