Medical debt can derail a person’s budget, drain their savings, and ruin their credit. If you’re one of the millions of Americans whose credit report suffers because of paid or unpaid medical debt, we have some good news for you.
Starting July 1, 2022, medical debt may no longer be a negative factor on your credit history.
What Is Changing with Medical Debt?
Consumers who have had to deal with unexpected medical bills are getting a break with this new change. The bureaus will be removing an estimated 70% of medical debt collections from consumers’ credit histories. Paid medical collections will no longer be listed on a consumer’s credit report or factored into their credit score.
In addition, the bureaus are giving consumers more time to pay unpaid medical debt before it shows up on their credit report. Previously, unpaid debt would be added to a person’s credit history after 6 months. With this change, the time has been increased to 1 year. More time to pay off debt will keep many consumers from dealing with negative medical debt affecting their credit scores.
Why Is This Change Happening?
The reason the bureaus are making this decision goes back to the reason the credit score was created in the first place, which was to predict the likelihood a person would pay a debt obligation on time and in full. Research has shown that medical debt is not a valid or accurate predictor that a person won’t pay their debt obligations.
After careful review, the bureaus decided that medical debt is a one-time issue consumers are hit with. Paying or not paying medical debt doesn’t give evidence that the consumer is or is not a good-credit risk.
Once the bureaus came to this realization, removing this information from the credit report, and not using it in the credit score calculation, was the natural next step.
Who Is Driving This Decision?
The three main credit bureaus Equifax, Experian, and TransUnion, have agreed on this move. They announced the change in March 2022.
The 3 bureaus are competitors, with different credit scoring formulations. This creates 3 different credit scores for consumers. Homeowners who apply for a mortgage loan get their credit pulled from these 3 bureaus, and the loan officer looks at the scores from each one.
In the past, 1 or 2 of the bureaus have made changes, while the other one has refused. It’s great news that they are finally on the same page with this decision.
How Is Medical Debt Being Removed from Credit Histories?
The bureaus will re-vamp their credit scoring formulations so debt that’s designated as “medical” will no longer be included on the credit report.
After the bureaus do this, paid medical debt collections won’t show up on a person’s credit report or be factored into their scores. Unpaid medical debt will be left off credit reports until it is 1 year old. The hope here is to give consumers more time to follow up with their insurance companies to get the debt paid, and/or to pay it themselves before it goes to collection.
Impact on Consumers
Including medical debt on the credit report has been a tremendous issue for consumers for years. One small collection that the consumer may not have even known about could tank their scores over 100 points! These collections hindered the ability to qualify for mortgages and other lines of credit.
Removing medical debt from credit reports will increase millions of consumers’ credit scores. This will be especially helpful for people with recent medical collections. Since credit scores are primarily driven by credit history from the last 6 months, recent collections have a far greater impact on a person’s credit score than older collections.
When Will This Happen?
As we mentioned above, this will go into effect on July 1, 2022. There is a second plan that goes into effect in early 2023. At that time, the bureaus won’t be including medical collection debt under $500 on credit reports. This move will further assist consumers with their credit scores, as many medical collections are for small amounts that went unpaid by the insurance companies. Up until now, these small collections have had just as much of an effect on a person’s credit score as large ones.
Always practice 4 actions for protecting your score and keeping it high (so you can qualify for the best rates):
- Check your credit report every 6 months. Make sure everything is correct, as 1 in 4 reports are estimated to have errors.
- Dispute errors with the reporting bureaus.
- Always pay your bills on time. This is the single biggest factor affecting the score.
- Keep your credit card balances low. The bureaus view high credit card balances as risky, which can cause your score to drop.
