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70% of medical debt is about to disappear from US credit reports.
When you think of debt, you may think of borrowed money that's due to be repaid. But many Americans find themselves struggling to repay expenses they have little control over: their medical bills.
Nearly one in ten adults in the US owe at least $250 in medical debt. This includes 11 million Americans who owe over $2,000, and 3 million folks who owe more than $10,000.
Over 90% of Americans had health insurance for at least part of 2020; but we still pay a lot for medical care. We spend $12,530 on medical expenses per person per year, nearly 20% of annual earnings for the median US household.
Research by the Consumer Finance Protection Bureau (CFPB) found that medical costs can be unpredictable and vary widely based on patient and provider. Markups are especially high for uninsured and out of network patients, emergency care, and at for-profit hospitals.
It can be tough to cover monthly premiums, high deductibles, and co-pay expenses – and it’s not always clear how much a visit will cost until months later.
Unpaid medical bills get turned over to collections companies, which happens more than you might think. Over 43 million Americans have medical collections on their credit reports, and nearly 60% of total collections in the US are due to unpaid medical bills.
Medical debt reporting is about to change dramatically
Following a CFPB report detailing medical debt burden in the United States, the three national credit bureaus announced major changes to medical debt reporting. The modifications, which take effect July 2022, will wipe an estimated 70% of medical debt from consumer credit reports.
- Paid off collections debt will no longer be reported
At present, any medical bill that gets turned over to collections can show up on your credit report for up to seven years – even if you pay it off. Come July, medical collections accounts will be cleared from consumer credit reports once you settle up your debt.
- Unpaid collection debt won’t show up for one year.
Until now, consumers had a six month grace period before medical collections showed up on a credit report. The upcoming changes extend that grace period to twelve months, doubling the time consumers have to establish payment plans, correct errors, and get current on outstanding balances.
- Medical collection debt less than $500 won’t be included
Starting in 2023, the national credit bureaus will no longer include medical debt collections less than $500 on consumer credit reports. Since most medical debt collections tradelines are less than $500, millions of Americans will get a clean slate and a second chance.
Medical debt on credit reports is a burden on consumers
“When it comes to medical bills, Americans are often caught in a doom loop between their medical provider and insurance company. Our credit reporting system is too often used as a tool to coerce and extort patients into paying medical bills they may not even owe.” – CFPB Director Rohit Chopra
For many Americans, it’s stressful enough to cover the initial cost of healthcare. But when their debt goes into collections, it can have far-reaching, long-lasting financial consequences.
In general, a collection can cause credit scores to drop. It’s harder to get approved for loans and credit cards when you have poor credit; and it can even cost consumers employment and rental opportunities.
Medical debt also increases risk of bankruptcy. According to the American Journal of Public Health, the majority of people who filed bankruptcy between 2013 and 2016 had medical expenses contributing to their financial crises.
Unpaid medical debt affects some Americans more than others
While research shows medical billing data is less predictive of future repayment than other credit obligations, Americans continue to be penalized with lower credit scores when their healthcare debt slips into collections. Some carry a disproportionate burden based on their race and where they live.
CFPB research found past-due medical debt is more prevalent among Black (28%) and Hispanic (22%) individuals than white (17%) and Asian (10%) individuals. Medical debt is also more common in southern US states, partially because these states have not expanded Medicaid coverage.
Unpaid medical debts above $500 could still hurt your credit
The upcoming credit reporting changes give Americans more breathing room to manage healthcare debt and prevent long-term damage to their credit. But this doesn’t mean you should skip out on your doctor’s bill.
Debtors will still be able to report medical bills over $500 once they’re 12 months overdue; and this information can show up on your credit report. While newer scoring models weigh unpaid medical bills less harshly than other collections debt, they’re still not widely used.
Even with extra time to sort out your bills, medical debt can be hard to handle. But it’s easier to deal with before it goes into collections. These strategies can help you pay less and avoid an overdue balance.
- Avoid the ER: Trips to the emergency room are some of the costliest healthcare expenses. When possible, make a telehealth or in-office appointment first and go to urgent care for acute issues. Visit the ER only for life-threatening situations.
- Check for errors: Medical bills can have dozens of individual charges, but they’re not always accurate. Request an itemized receipt and review it line-by-line – does everything you’ve been charged for match the care you received?
- Set up payment plans: Most health care providers offer no- or low-interest payments plans. Explore options with your provider so you can pay your debt without drowning in interest or risking a collections line.
- Ask about financial assistance: Some hospitals offer help to people burdened with medical debt. Depending on your income and situation you may have your debt written off or reduced dramatically – so ask about your options.
Credit score about to rise? Act wisely to maintain your credit gains
If you’re one of the millions of Americans affected by the upcoming medical debt reporting changes, you could see your credit score increase substantially come July. Take action to maintain your credit gains – or increase your score even further.
- Get Current: Though they carry less weight over time, missed and late payments can stay on your report for up to seven years. Get current on any outstanding accounts to keep your credit score on the up-and-up.
- Pay Down Debt: The average American carries over $5,000 in credit card debt. Paying down your balances improves your debt-to-credit ratio, one of the most influential factors in your credit score.
- Pay Off Collections: While medical debt collections will be wiped out automatically when you pay them off, other collections accounts will linger. Debt collectors may be willing to remove your collections history if you pay off your outstanding balance. Just be sure to get any agreements in writing.
- Start Credit Building: Credit-building platforms like StellarFi help consumers build a positive credit history without taking on additional debt – all you need to do is link your existing expenses.
Everyone deserves Stellar credit
StellarFi is on a mission to create financial equity for all. A public benefit corporation, we help override the drivers of cyclical poverty and wealth inequality by providing universal access to good credit and financial solutions.
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The bills you pay should pay you back – get started with StellarFi today.