Do you have Medical debt?
Major modifications are on the way to how it is reported by credit agencies
A number of consumers might find themselves in financial disaster due to the bad outcomes from the health care debacle. Over 50% of debt on credit reports are due to medical expenses and soon consumer’s credit reports might be in for a major blow.
There are currently working on the way medical debt is evaluated and how it is reported by the credit agencies and the expected result is to minimize the traumatic financial outcomes of having to pay for health care issues.
From September 15, Equifax, TransUnion and Experian – the 3 biggest credit reporting companies – will impose a 180-day cooling off period before the medical debt is included in the credit reports of consumers. The intent of this 6-month time frame is to ensure consumers have enough time to resolve payment delays and disputes with insurers.
Furthermore, credit bureaus will delete medical debt from credit reports if the debt is paid by the insurer. (Paid medical debt is not penalized by any credit scoring models irrespective of the source paying.)
These changes are a result of two efforts by states trying to help consumers: First a settlement by Eric Schneiderman (New York Attorney General) and the 3 credit reporting companies as well as an agreement not too long after between the reporting agencies and attorneys general in 31 states. These changes will be rolled out countrywide eventually.
According to Julie Kalkowski Executive Director of Financial Hope Collaborative at Creighton University in Omaha, Nebraska the 180-day waiting period is a major move toward a process that is more equitable. This is also a change to offer financial education along with coaching to single mothers with low-income.
Doctors and hospitals usually pass on patient debt to collection agencies instead of trying to collect overdue medical bills on their own. When providers make that move can vary quite a bit.
Kalkowski went on to say that when there is no standardized time frame, bills can go into collections if they are 30 or 60 days overdue compared to the 6 month cooling period.
Kalkowski pointed out that a number of women who completed the Creighton program had medical bills that were sent to collections within 60 days of being overdue and in many cases, the amount was less than $150.
As many as 43 million Americans have medical debt that negatively impacts their credit rating as per a federal Consumer Financial Protection Bureau in 2014, which is their most up-to-date data. Medical debt in collection averaged $579, compared to non-medical debt which averaged $1,000. The study also discovered that medical debt was the only blemish on credit reports for 15 million consumers.
It is not surprising that there is an increase in the number of people who have health plans with high deductibles and significant personal financial responsibilities for their own health care. This observation is from Chad Mulvany a policy director at the Healthcare Financial Management Association, which is a membership group for financial professionals.
Furthermore, he said that people who were once considered a good credit risk are now burdened with huge medical bills.
Lenders depend on credit scores and reports to determine the risks of getting their loan repaid. Three digit credit scores are given to people based on an algorithm used by the credit scoring companies and the range is usually between 300 and 850. This is a summary of the consumer’s credit risk based on the info in their credit report at that particular time. The higher the score, the lower the risk.
VantageScore and FICO are credit-scoring companies that are adjusting their models to take into account that medical debt isn’t a good indicator of someone’s credit risk.
Ethan Dornhelm, an analyst and VP at FICO states that those who have medical debt are not as likely to default on their non-medical debt.
To tackle the problem, current VantageScore and FICO models distinguish between non-medical and medical debt. According to Sarah Davies, Senior VP at VantageScore Solutions, those who have medical debt that has gone into collections get a smaller penalty compared to those with non-medical debt.
This can have a positive impact on someone’s credit score.
With the newest FICO9 model, anyone with only a medical credit blemish would see their median credit score go up by about 25 points compared to the previous versions, according to FICO’s Dornhelm.
There is one drawback though; most banks and lending institutions don’t use this updated version of credit-scoring yet. Therefore, even though medical debt ought to have a bigger impact on credit scores today, in many instances, there has been no change.
What should you do as a consumer? You have no control over which model is used by a lender, however, you can keep an eye on your credit report regularly to ensure it is correct. As a consumer, you are allowed 1 free credit report annually from each of the various credit reporting companies.
Davies from VantageScore suggests that once a medical debt has been paid in full, it should be cleared from your credit report and if it is under 6 months, ask them when it is going to be removed.
