Health care bills are about to pose little threat to the financial well-being of millions of Americans.
The three major credit bureaus are erasing most medical debt from people’s credit reports, and the Biden administration is reducing or eliminating medical debt as a factor in government credit decisions.
Here’s what you need to know about medical loans.
1 in 5 US households have medical debt
According to the Consumer Financial Protection Bureau, roughly 1 in 5 American households has medical debt. Some are not insured, while others struggle to pay the deductible and other cost-sharing. Insurance billing is Byzantine, to say the least, and it’s easy to lose track of the bill while your insurer decides whether or not to pay how much.
Many of these unpaid bills end up on people’s credit reports. The CFPB found medical debt on 43 million credit reports last year, and medical debt made up 58% of all bills in collections by the second quarter of 2021. Collections can lower your credit score, making it harder to get a loan or requiring you to pay higher interest rates. Bad credit can also put you off a job or apartment, and require you to pay more for car and home insurance.
Newer versions of credit scoring formulas treat medical debt as less stringent, as research shows that health care bills are not as reliable as a gauge of creditworthiness compared to other types of collections. But most lenders still use old credit scores that don’t differentiate medical debt from other overdue bills.
Instead of waiting for lenders to update them to the latest credit scores — a process that could take years, if it ever happens — the CFPB announced on March 1 that it would investigate whether medical debt should be included in credit reports. Or not.
Seventeen days later, the three credit bureaus — Equifax, Experian and TransUnion — responded by promising to remove about 70% of medical debt from consumer credit reports within the next year.
Most medical loans are disappearing from credit reports
Beginning July 1, all paid medical collections will be removed from people’s credit files, and no unpaid bills will be reported until 12 months have passed – an increase from the current period of six months. By June 30, 2023, all three bureaus will also stop reporting unpaid medical debts of less than $500.
Consumer advocates applauded the changes but noted that those with large debts would still face credit damage. The non-profit health research organization, formerly known as the Kaiser Family Foundation, has a medical debt of more than $1,000, and 3 million (1%) have medical debts of more than $1,000, according to KFF. owes more than $10,000.
Recent moves from the Biden administration could help improve access to credit. On April 11, Vice President Kamala Harris announced additional reforms, including reducing or eliminating medical debt as a factor in government debt decisions. This will make it easier to get multiple home and business loans. In addition, Veterans A Cases, which has already wiped out $1 billion in reimbursements owed by veterans, has promised to streamline the process so that low-income veterinarians can have their VA bills forgiven. The VA also stopped reporting most veterans’ medical debts to credit bureaus.
What can you do to deal with medical debt?
Soon you won’t have to worry about a minor medical bill lowering your credit score. But catastrophic medical bills can still strain your finances. Consider taking the following steps to reduce your vulnerability to medical debt:
Keep covered if possible. Insured people enjoy greater consumer protection and better access to health care than uninsured people. People who are not covered by government plans such as workplace insurance or Medicare can find coverage through the Affordable Care Act exchanges. Start your search at Healthcare.gov. Most uninsured people qualify for a subsidy to make premiums more affordable.
– Check all medical bills for errors. Billing errors are common, so request specific bills for hospital stays and complicated procedures. Dispute whatever mistake you find.
– Asking for help. Hospitals and other health care providers may have financial assistance programs that can reduce or eliminate your bills. (Non-profit hospitals require such programs, but they may not offer help unless you ask.)
Avoid using a credit card if you cannot make the full payment. Credit cards carry high interest rates which makes it difficult to repay the loan. Many health care providers offer interest-free payment plans that allow you to pay your bill over time.
This column was provided by personal finance website NerdWallet to The Associated Press. Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.” Email: email@example.com. Twitter: @lizweston.
NerdWallet: How to deal with medical bills on your credit report?