How Do Medical Bills Affect Your Credit Score
Trying to finance an auto loan or get a new mortgage and you’re just finding out that you have delinquent unpaid medical bills on your credit report. One question that should immediately come to mind is how do medical bills affect your credit score and how do I get them removed? In addition, you might also consider questions like do medical bills affect your credit when buying a house, car or obtaining a student loan.
If you’re one of the 43 million people with debt from unpaid medical bills on your credit report you’re not alone.
Unlike credit card debt, medical bills are tough to easily avoid. Furthermore, if an illness, disease, or emergency happens, there’s not much of a choice. People from all walks of life have trouble with medical bills — uninsured and insured alike.
If you’re concerned about how do medical bills affect your credit score, there is hope. By creating an action plan, you can find yourself working out of medical debt. In fact, it may not be as difficult as you think.
But first, some great news.
FICO Changes and Your Credit Score
FICO (Fair Isaac Corporation) is the credit scoring service that’s the cumulative average from the 3 different credit bureaus — TransUnion, Experian, and Equifax.
For most consumers their biggest question is how long do unpaid medical bills stay on your credit report and how does it impact my credit score. To answer that you need to understand is how FICO applies their medical debt collection rules and how they follow unpaid medical bill collections laws.
Back in 2015, FICO made some changes to their policies. The changes affected the reporting of medical bill debt to your credit score.
- Unpaid bills stay unreported by the credit bureaus for 6 months
- Credit bureaus do not report unpaid bills less than $100
- Credit agencies will remove unpaid medical bills from your credit report that you do pay
That’s good news for people who recently found themselves dealing with the inability to pay off medical debt. Also for people with bills that just went into collections.
How Does Medical Debt Affect Your Score?
In addition to the changes mentioned above, you should be aware that you have different types of credit scores and all affected differently depending on the credit scoring model. The new FICO 9 score disregards paid collections accounts. In addition, medical collection accounts are weighted less under the new model.
Under the FICO 8 model the most frequently used by lenders, looks at all small medical bill collection accounts if the original balance is over $100 dollars.
The Vantage Score 4.0 separates medical bill collections for other forms of collection accounts, weighting medical bill collections less than other forms of collection accounts. Vantage Score 4.0 also ignores medical bill collections aged less than 6 months.
Although FICO 9 and Vantage Score 4.0 can make life a little bit better, most lenders use older types of credit scores that don’t give medical debt any kind of preferential treatment. As a result, expect that if you find a medical debt collection on your credit report it will be adversely viewed when applying for credit.
Watch This Money Sense Video About Unpaid Medical Bills
In the end, medical debt can impact you credit score, some scores more than others. Even more so if your lender uses older credit scoring methods.
If you’re past that point and have unpaid bills on your report, there are steps you can take. To completely understand how do medical bills affect your credit score, follow this guide to set in motion a plan to repair your credit.
Step 1: Check Your Report
When’s the last time you requested a copy of a credit report for yourself?
Perhaps you applied for a loan not too long ago and were told your score. Knowing your score isn’t enough.
It’s important to know which of your unpaid bills were reported to the credit agencies. It’s possible some bills haven’t posted yet (due to the FICO changes mentioned above). That’s good news and gives you a starting point for what bills to tackle first.
Step 2: Review Your Bills
Check current and past bills for mistakes. It’s not uncommon to find errors for items like:
- Duplicate charges
- Charges for services not received
- Duplicate medications
- Charges for procedures not received or canceled
- Unperformed lab tests
If you find an error, contact the company right away. They will assist you on how to delete medical collections from your credit report. If you still can’t get the problem resolved, consider disputing medical bills on your credit report. You can do this by finding a sample letter to dispute unpaid medical bills on your credit report. Be patient, sometimes it takes a while for things to get corrected.
Step 3: Don’t Ignore Your Bills
Don’t throw up your hands in defeat believing things are a lost cause. Contact the hospitals, doctor’s office, your health insurance company, or collection agency to discuss a payment schedule. Much to your surprise — especially an unpaid medical bill with a collection agency — how willing they are to negotiate a reduction in the total payoff.
If they know you’re making a valid attempt to pay the debt, they’re often much more willing to work with you.
Step 4: Make the Payments
Start with the bills with the smallest amounts first. One good thing about unpaid bills is that it’s not the standard practice to charge interest or late fees.
Now that we have answered the question, how do medical bills affect your credit score, it’s time to take action. Establish a plan. Especially if you’re younger, or just beginning to work on establishing your credit.
Having negative marks on your credit report hurts your future financial status. In fact, you may be wondering will medical collections prevent me from buying a home and do medical bills affect your debt to income ratio.
Unpaid medical bills do affect your debt to income ratio (DTI) ratio when arranging financing to buy a home. Loan originators use this calculation to determine if you can take on future mortgage payments. When calculating your back end DTI (recommended cap is 36%) lenders will consider medical debt expecting to last 10 months or longer.
At a minimum, unpaid bills will or at least make it more difficult to qualify for home or auto loans, a line of credit, and may even result in higher auto insurance rates. In many cases, credit card companies determine your APR based on your credit score.
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