How Medical Debt Affects Your Credit
October 16, 2018
The Crushing Effects Of Medical Debt
How pervasive is America's medical debt problem? According to 2017 data from the credit bureau Experian, unpaid medical debt in America topped $127 billion. New data from Consumer Reports shows that almost 30% of insured Americans had unpaid medical debt turned over to collection agencies in the past two years. A 2013 analysis by NerdWallet Health found that unpaid medical bills were the number one cause of bankruptcies, surpassing unpaid mortgages or credit card debts.
Even if you aren't driven into bankruptcy, unpaid medical debt will eventually show up on your credit report – resulting in a lower credit score that further degrades your financial health. The Consumer Reports survey found that nearly one in five Americans has suffered a credit score drop related to unpaid medical bills. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Medical bills are particularly tricky because of the confusing billing and insurance systems. Errors and miscommunication are common. Of the 30% with unpaid medical bills in the Consumer Reports survey, 24% didn't understand that they owed any money and 13% never received the bill at all. Another 10% had an already-paid bill sent to collections by mistake.
It Could Work Out
If your insurance won't cover an unpaid medical bill and you have to pay it yourself, it's possible that your credit score may not suffer. Newer versions of both the FICO and VantageScore systems lessen the penalty for medical debt. Unfortunately, most lenders still use older credit scoring versions.
Ask a potential creditor what scoring system they use. If you have options, vendors using the FICO 9 or VantageScore 4.0 models are a better choice.
Regardless of the scoring system used, medical debt in collections will stay on your credit report for up to seven years. You'll have to work even harder to lessen the effect by never missing a payment and keeping your credit usage and overall debt load under control.
New Regulations May Help
At least you have more time to address problems. Thanks to an agreement between the three major credit bureaus (Experian, Equifax and TransUnion) and a group of state attorneys general, the credit bureaus must wait 180 days before adding your unpaid medical bill to your credit report. New regulations also require that medical bills eventually paid by your insurance company must be taken off your credit report.
Even if you have sufficient insurance coverage, you may need that 180-day period. If the insurance company is late with their payment, the provider's bill could be in collections before you know how much your insurance will cover.
The key document is the explanation of benefits (EOB) – a statement from the insurance companies that explains what medical treatments have been covered by insurance and clarifies the balance you must pay. Providers may send bills before insurance companies have time to process them and send the EOB.
Wait for the EOB before making payments to avoid overpaying for medical care – but if the EOB runs late, contact your health insurance provider. Even with the 180-day period, you may have trouble resolving disputes or errors in time.
Meanwhile, ask for an itemized bill from the provider. It can help you spot errors and can be useful if you have to negotiate payment with providers or insurers.
Know Your Plan, Know Your Doctors
Studying insurance coverage is nobody's idea of a good time – but neither is a massive medical bill that takes you by surprise. Know your plan's coverage limits and which providers are in your network. Insurance plans reimburse far less – or nothing – for out-of-network providers.
Since plans change frequently, call the doctor's office beforehand to make sure they're in your provider network and they have your most recent medical information. For hospital admissions, only agree to see in-network providers – it's possible to acquire bills from out-of-network specialists within the same hospital system. If asked to sign a document of financial responsibility, write in that you'll only accept in-network providers.
Don't Accept Errors
What happens when you end up with an unpaid medical bill on your credit report by mistake, such as a paid bill being sent to collections, failure to remove a bill that insurance has paid, or posting a bill before the 180-day waiting period? Nothing – if you don't challenge the error.
Gather all your evidence and file a dispute with any credit bureau that reports the error. Thanks to the Fair Credit Reporting Act, the credit bureaus are required to follow up on all disputes. Be persistent. Keep copies of all documents and take notes on all communications.
Be similarly persistent with your insurance company and provider. Follow up to make sure that the provider has filed the insurance claim and that the insurer actually makes the payments on bills they agreed to cover.
The Takeaway
Medical procedures can be traumatic enough without the added trauma of an unpaid bill dragging down your credit. Be proactive where possible by understanding your coverage, staying with in-network providers, reviewing all bills and EOBs, and addressing any problems as quickly as possible.
Did you receive a medical bill you don't recognize? Don't ignore it. Follow up to ensure that nobody has committed fraud by receiving medical care in your name. Challenge any fraudulent charges or recording errors with the appropriate credit bureau(s).
Stay vigilant to avoid unpleasant medical bill surprises that can damage your credit score as well as your wallet.
If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, join MoneyTips.
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