Medical debt? Big changes are coming to the way credit bureaus report it

For many consumers, an unexpected health disaster can quickly turn into a financial calamity. Just over half of all debt that shows up on credit reports is related to medical bills, and consumers may find that their credit score is as bad as their bodies.

Changes in the way credit bureaus report and assess medical debts are underway and are expected to reduce some of the painful financial consequences of a health problem.

Starting September 15, the three major credit bureaus – Experian, Equifax and TransUnion – will set a 180-day waiting period before including medical debt on a consumer’s credit report. The six-month deadline is intended to ensure that there is sufficient time to resolve disputes with insurers and late payments.

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Additionally, credit bureaus will remove medical debt from consumer credit reports once it is paid by an insurer. (Some credit scoring models do not penalize medical debts paid from any source.)

The changes stem from two efforts by states to help consumers: a Regulations 2015 negotiated by New York Attorney General Eric Schneiderman and the three credit bureaus and a agreement shortly after between agencies and 31 state attorneys general. The changes will be implemented nationally.

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The 180-day waiting period is “a big step towards a fairer process,” said Julie Kalkowski, Executive Director of the Collaborative Financial Hope at Creighton University in Omaha, Neb., which provides financial education and coaching for low-income single mothers.

Rather than trying to collect overdue medical bills on their own, hospitals and medical offices typically hire collection agencies to interview patients. But when vendors take this action varies widely.

“Without a standardized process, some invoices are sent to collections because they are 30 or 60 days past due instead of six months,” Kalkowski said.

Kalkowski said several of the women who took the Creighton program had doctor’s bills that were sent to collections before they were 60 days past due. The total amount owed in most cases was less than $ 150, she said.

Forty-three million Americans have medical debt in collection that negatively affects their credit, says 2014 report by the Federal Bureau of Financial Consumer Protection, the most recent data from the bureau. The average amount of medical debt in collection was $ 579, compared to $ 1,000 for non-medical debt. For 15 million consumers, medical debt was the only flaw on their credit report, according to the study.

Perhaps this is not surprising given the growth in the number of people with high deductible health plans and significant financial health care responsibilities, said Chad Mulvany, director of policy at Healthcare Financial. Management Association, a membership organization for finance professionals.

“More and more people who would generally have been a good credit risk are now struggling with big bills,” he said.

Lenders use credit reports and credit scores to assess the risk that someone will not pay back a loan. Credit scoring companies create algorithms that use data from people’s credit reports to assign a three-digit credit score, usually between 300 and 850, which summarizes a person’s credit risk based on the information. contained in a credit report at that time. Higher scores indicate lower risk.

The credit scoring companies like FICO and VantageScore that develop these models have adjusted their formulas to account for the fact that medical debt is not necessarily an accurate predictor of whether someone is a good credit risk.

“Those with medical accounts are less likely to default on their accounts than non-medical accounts,” said Ethan Dornhelm, vice president of scores and analytics at FICO.

To address this issue, the new FICO and VantageScore models distinguish between medical and non-medical debt. People with medical debts in collection receive a lower penalty than those with non-medical collections, said Sarah Davies, senior vice president at VantageScore Solutions.

Change can make the difference in people’s credit scores.

Under FICO9, the newer model, a person whose only major credit spot is one or more medical collections would see their median score increase by about 25 points compared to older versions, said FICO’s Dornhelm.

But there is a catch: Many banks and other lenders have yet to adopt the most recent versions of credit scoring models. So while medical debt shouldn’t have such a big impact on a person’s credit rating today, in many cases nothing has changed.

What should a consumer do? You can’t control the scoring model a lender uses, but you can regularly check your credit report to make sure it’s accurate. Consumers are entitled to a free credit report from each credit reporting company every year.

“If there is a medical debt that has been paid, it should be written off in the future, and if it’s less than six months old, find out when it will be removed,” advises Davies of VantageScore.