Can Medical Bills Ruin Your Credit?
Ever been puzzled by bills from a doctor or hospital? Not sure which services you were supposed to pay for and the amount owed? Unclear on whether to pay the provider or wait for your insurance company to do so? If you answered yes to any of these questions, you are not alone.
A recent study found that nearly 40 percent of Americans do not understand their medical bills. Nearly one-third of respondents admitted to letting a medical bill go to collection, as a result.
And though millions of Americans believe that medical debt is not used in calculating a credit score, it often is. (A credit score, to refresh, is a three-digit number used by banks and other lenders to determine the likelihood that a borrower will repay a loan.) Even paying off a medical bill in collection does not prevent medical debt from being used as a factor in a credit score.
In fact, an estimated 31 million Americans have medical accounts in collection on their credit reports. So the widely-misunderstood consequences that medical debt have on credit scores, and whether those consequences are fair, or reasonable, are important ones.
A study published in the Federal Reserve Bulletin found that more than half of accounts in collection are medical accounts. The study raised questions about the predictive value of such accounts since such accounts often involve disputes with insurance companies over liability for the accounts or because the accounts may not indicate future performance on loans.
This current system is stacked against consumers. It penalizes the sick and injured. Even when one pays off a medical collection bill in full, current law allows for that account to remain on a person’s credit report for up to seven years. (One mortgage lender’s recent simulation to remove zero-balance medical accounts from a group of credit scores saw the clients’ scores increase by 50 to 100 points.) Such inaccuracies in credit reports slow America’s economic recovery. They increase the cost of a loan or result in an outright denial. It’s a system that harms hardworking Americans.
A recent hearing and new bill suggest that Congress is working to change this unfair and all-too-common practice. (Here’s the link to the hearing and testimony.)
At this hearing before a House Financial Services Subcommittee, several industry representatives testified that they did not believe that medical debt had predictive value or bearing on a client’s future overall creditworthiness. However, the dominant scoring agency, FICO, admitted that medical debt is used in their scoring algorithm.
Rep. Mary Jo Kilroy, a Committee member from Ohio, has introduced legislation – HR 3421, The Medical Debt Relief Act – to address this important problem. Her bill requires medical accounts that have been fully paid or settled – accounts with a zero balance – to be removed from a credit report within 30 days. This proposal enjoys bipartisan support and has more than 90 co-sponsors in the House. And momentum is growing: Sen. Jeff Merkley (D-OR), a member of the Senate Banking Committee, is reportedly planning to introduce a Senate bill within the next week.
By passing HR 3421, Congress would protect families and ensure them that they will no longer be compromised after doing the right thing and paying their outstanding medical bills. This straightforward proposal will provide relief for millions of Americans and Congress should act promptly to ensure its passage.
–Mark Rukavina, director of The Access Project