Medical Debt and Your Credit Scores
Medical debt can occur at the most inopportune time and is the most common type of collection account, representing 52 percent of all debt on credit reports, according to the Consumer Financial Protection Bureau (CFPB). Medical debt can damage your credit making it difficult to obtain low interest credit cards, and loans for a home or a car. Medical Debt occurs in almost one in six American credit reports, according to the Federal Reserve, and about 40 percent of Americans had a lower credit rating the prior year due to these charges.
Anthony Sprauve, a spokesman for myFICO.com tells Bankrate that any collections item, medical or not, can lower a person’s FICO credit score by as much as 100 points. Typically, if you have a higher credit score, a negative item will hurt more than if you had a lower credit score.
A FICO score is simply an overview of your creditworthiness at a point in time. Medical debt can occur at random and responsible parties who have a good payment history can be categorized with those who are otherwise financially irresponsible.
The CFPB has announced that the three major consumer reporting agencies will be required to provide consistent and accurate reports to the Bureau on how disputes from consumers are being handled. With medical debt affecting some 43 million Americans, the Consumer Financial Protection Bureau is taking steps to ease that burden. “It’s hard for consumers to navigate the medical debt maze and come out with a clean credit report on the other side,” said CFPB Director Richard Cordray. “The CFPB is taking action to improve credit report accuracy. Getting medical care should not make your credit report sick.”
Medical debt can happen at anytime and can prove to be more costly than any other type of debt. An unforeseen car accident or illness can pack on medical bills and is charged in a different way than other unpaid bills, such as utility or cable bills. Most of the time consumers are on the hook for the entire medical bill until insurance works out the payments.
Medical debt can occur because of billing issues between medical providers and insurers. As the Consumer Financial Protection Bureau indicates many consumers are not aware that they owe money until a call received from a debt collector or is seen as a new item on their credit report. Much of the medical debt that ends up on consumers’ credit reports is provided to the credit reporting agencies by third parties who often specialize in this area. These collection items can, for the most part, stay on a credit report for up to seven years.
The CFPB study draws from sources such as healthcare providers, credit reporting companies, consumer complaints, debt collection agencies, and healthcare professionals. The results are staggering. Over half of all debt on credit reports is from medical debt; a whopping 52 percent is the result medical expenses. Twenty percent of credit reports contain overdue medical debt, 15 million Americans have no other debt besides medical debt on their credit reports, and the average reported medical debt is $579, compared to the average debt collection item on a credit report, which is $1,000.
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