Medical debt can have a big impact on your credit score.
It’s not surprising that twenty percent (20%) or forty (40) million Americans cannot afford health insurance (https://abcnews.go.com/Health/Healthday/story?id=4509618&page=1) and another forty percent (40%) or eighty (80) million Americans have high deductible health insurance (https://www.beckershospitalreview.com/payer-issues/cdc-finds-43-2-of-americans-have-high-deductible-health-plans-4-additional-stats.html).
Managing medical debt is trickier than managing other kinds of debt. Doctors and hospitals use proprietary billing codes that only the service provider understands. Consumers often receive bills from multiple healthcare entities for the same procedure. Making sense of all the bills and the variety of different service providers is confusing and time consuming.
Insurance companies compound the confusion with their billing practices. Sometimes, it feels like no one in the healthcare industry knows how much insurance will pay towards a procedure or even if health insurance will pay for it at all.
When a medical bill is past due, service providers stop mailing statements and pass the unpaid debt to collection agencies. The bill collectors immediately report the unpaid debt directly to the credit bureaus planning to use the affected credit score as leverage for payment.
Until recently, this leverage was an effective collection strategy. Imagine a consumer’s surprise when a credit application is declined for an unpaid $99.00 medical bill that is only a few months old. The collection tactic works. The debt got paid, but the consumer’s credit score takes a hit for a year or more.
If you find yourself in this situation, read the Monkey’s post “The 3 Most Powerful Words in Credit Repair” (https://www.creditmonkey.pro/the-three-most-powerful-words-in-credit-repair/) before you pay the medical bill to avoid the credit score hit.
Credit Bureaus Help with Medical Debt
Until recent rule change, collection agencies and the credit bureaus treated medical bills like any other unsecured debt. The bill gets marked delinquent thirty (30) days after the due date and is reported to the credit bureaus. That happened even if the consumer didn’t know that his insurance company failed to pay the bill.
Today, the three (3) major consumer credit bureaus require a six (6) month waiting period before medical debt can be added to a credit report. That gives people with medical debt time to reviews bills, determine what insurers will pay, and/or negotiate a payment program with service providers before medical bills are considered delinquent. Normally, that’s enough time to figure things out and avoid the credit score hit.
The rule change is huge for the one (1) in six (6) Americans with medical debt dragging down their credit scores. (https://www.pbs.org/newshour/health/millennials-rack-up-the-most-medical-debt-and-more-frequently). However, the rule change is not retroactive. Any medical debt reported prior to the rule change will remain on a credit report unless it is addressed.
Help From FICO
In 2014, the Fair Isaac Company (FICO) introduced a new scoring model, FICO® Score 9. The new model included significant changes to the way medical debt is calculated into a credit score. Under Score 9, the scoring algorithm disregards all paid medical collections accounts.
Only third-party accounts (those with collection agencies) are ignored when paid. Any missed payments associated with the original credit account, before it was sent to the collection agency, will still be included with the Score 9 calculation. So, as long as payments to the collections agency are on time, medical collections should be completely removed from a credit record.
More Help From FICO
Unlike previous scoring models, FICO® Score 9 differentiates between unpaid medical debt and unpaid non-medical debt. Then, Score 9 places less weight on unpaid medical debt compared to other debt resulting in better overall credit scores.
FICO® Score 9 also disregards any medical debt negotiated or satisfied for less than the full amount. Prior to Score 9, settled medical debt was a scaled derogatory just the same as regular debt. Now, settled medical debt is completely disregarded in credit scoring.
Bad News – Good News
The bad news is that lending institutions are slow in adopting FICO® Score 9. While Score 9 was around since 2014, less than half of the big lenders adopted it. The consensus reason for this is the belief there are few changes in Score 9, compared to the prior version. Accordingly, the expense associated with systems conversion to Score 9 is not justified.
The good news is that Score 10, called UltraFICO™ Score, was announced in 2018. (https://www.fico.com/en/newsroom/experian-fico-and-finicity-launch-new-ultrafico-credit-score ). Its projected release date is mid-year 2019. UltraFICO promises more features designed to help consumers with marginal credit and/or “thin” credit profiles. UltraFICO™ retains the medical debt scoring improvements available in Score 9 while adding features necessitated by technology and modern lifestyles.
UltraFICO™ Score was well received with many large lenders already announcing that they will migrate from Score 8 to UltraFICO™. It appears that there are enough changes in UltraFICO™ to justify the cost of systems migration to lenders. That’s good news for consumers.
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