How Does Medical Debt Affect Your Credit Rating?

Updated on February 5, 2023

Medical debt has brought mostly bad news for every American over the past several years. But a recent report from the Centers for Disease Control and Prevention (CDC) has brought some good news for once. 

In the latest issue of the National Health Statistics Reports, CDC researchers noticed a slight decline in Americans struggling with paying off their medical debt. Based on data from the National Health Interview Survey, those with such struggles only comprised 10.8% in 2021, a modest drop from 14% in 2019. 

Researchers quickly noted federal aid during the coronavirus pandemic as a factor, namely those provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Regardless, they also said that medical debt remains a serious concern, with 10.8% translating to more than 30 million Americans still dealing with medical debt. 

More importantly, that’s over 30 million whose medical debt has blemished their credit profile. Because of this, they often get trapped into a vicious cycle where failure to qualify for personal loans leaves them unable to pay for treatment, which worsens over time.  

Here’s a closer look at medical debt and how it can affect one’s credit rating. 

A State’s GDP’s Worth In Debt 

According to the latest Peterson-KFF Health System Tracker report, Americans owe an estimated USD$195 billion in medical debt. If it were its own state, medical debt would be the 35th largest in the U.S. in terms of gross domestic product (GDP), larger than that of Arkansas. 

It’s not like the debt is mostly chump change, either. The same report states that the majority of Americans owe USD$10,000 or more, while only 2% owe USD$1,000 or less. This makes sense, given that a person spent, on average, over USD$12,000 in healthcare in 2021. The cost includes deductibles and premiums. 

This long-standing problem doesn’t discriminate; it can affect anyone whether or not they have insurance coverage. The report also states that many insured people tend to have insufficient liquid assets to pay out-of-pocket medical expenses. It suggests that individuals and families should have at least USD$2,000 in liquid assets, but not all have that much money at their disposal. 

Experts cite multiple reasons why people end up with ridiculously high medical bills. One well-known reason is cutting corners in treatments, a knee-jerk reaction from living in a country with one of the most expensive healthcare systems on Earth. Researchers at the Harvard T.H. Chan School of Public Health cite three reasons for this inconvenient fact. 

  • No price caps on expensive treatments like organ transplants and MRI 
  • A complex system requiring patients and medical staff to determine a treatment’s necessity 
  • Consolidation of hospitals and insurance companies into a powerful healthcare industry 

The result is the vicious cycle mentioned earlier. Patients cut back on what the doctor prescribed to keep spending low, including the frequency of hospital visits for checkups. These cutbacks don’t effectively treat the condition, which often worsens, leading patients to pay more for treatment, which they also cut back to save costs. 

Sometimes, cutting back doesn’t work because they’re afflicted with a condition where the only treatment costs way beyond their coverage. The federal limit for high-deductible health plans is currently at USD$7,050 for an individual, but the median cost for cancer treatment—including drugs—can be six times as much. 

Another reason for the piling debt is charging premiums via credit card. While convenient since there’s little worry about missing payments, a credit card can be a double-edged sword. Not only do you have to deal with interest rates, but late payment fees can quickly add up.  

Impact On Credit Scores 

A study conducted by the Consumer Financial Protection Bureau (CFPB) last year revealed that medical debt negatively impacts credit scores as soon as it appears on credit reports. It deducts an average of 12 to 17 points

The deduction is more significant than it looks, considering that people with medical debt have below-average credit scores. Relative to the national average of 714, the CFPB study stated that their credit scores range between 573 and 619.  

AdobeStock 228969232

The high-end score, achievable by settling their medical debt on time, is still in the Fair bracket by FICO® standards. Anyone taking out a loan may still qualify for lower interest rates but for smaller loans than expected. The situation is worse for those below 580, as willing lenders are few and far between, and they’ll most likely impose more unfriendly rates and borrowing limits.  

Speaking of loans, the resulting credit inquiry can drag one’s already-low credit scores closer to rock bottom. Every time one applies for a loan, the lender conducts a detailed background check of the borrower’s credit profile. The industry refers to this as a ‘hard pull,’ which often deducts a few points from the borrower’s credit score. 

Again, the deduction is more significant than it looks. People with medical debt struggle to apply for a loan, let alone secure decent terms, but hard pulls persist whether or not they’re successful. Those point deductions can add up quickly as people go from lender to lender, though the report only encompasses inquiries made in the past 12 months. 

In this case, experts advise performing the credit check personally, known as a ‘soft pull.’ These inquiries may still appear on the report, but they don’t impact credit scores in any way. Creditors can perform soft pulls using software like Soft Pull Solutions and others to determine if one qualifies for special loans and credit card offers.  

It’s also prudent to conduct soft pulls once every few months, as it can be easy to miss a situation giving you as much grief as your medical debt, such as a missed mortgage payment or one that’s long been settled. 

The Big Three Take Action 

Another good news came early this month: major credit reporting bureaus have agreed to remove paid medical collections from their reports.  

CNBC reports that the decision is part of a larger effort by the Biden administration to eliminate medical debt from government lending decisions. Scheduled to take effect in July, it comprises three significant policy changes. 

  • Paid medical collections will be removed from credit reports. As mentioned earlier, such records can remain on a report for years. 
  • The duration in which unsettled medical collections must wait before being reported has increased to one year from six months. 
  • The Big Three will no longer include medical debt under USD$500 on credit reports. The CFPB study said such debts comprise roughly two-thirds of all reports with medical debt. 

In an interview with Yahoo! Finance Live, senior industry analyst Ted Rossman believes these changes will improve credit scores by 100 points or more. In other words, Fair scores will instantly be promoted to the Good tier, allowing people to secure better loan terms. 

Additionally, it can help address concerns of debt collectors potentially ‘weaponizing’ credit reports, as CFPB director Rohit Chopra said in an official statement. He argued the possibility of using such reports to force people to pay dues that have already been settled or that they don’t owe. 

Many people make the mistake of comparing medical debt to credit card debt, which can’t be further from the truth. Coming down with an illness isn’t the same as wanting that new phone. Seeking medical attention comes with plenty of uncertainties as far as expenses are concerned. There’s no exact figure of how much treatment will cost, let alone the policy’s coverage, until the hospital finally presents the bill. 

For the record, it isn’t precisely the hospital that’s slapping unpaid dues on one’s credit report. However, the hospital will sell the debt to a collection agency when left unsettled for too long. These services then report the debt to the credit reporting bureaus.  

A Patient’s Options 

Amid this voluntary move by the Big Three, industry leaders believe patients should have more options in settling or avoiding medical debt than the ones available. Asking people to pay their dues shouldn’t be at the mercy of abusive calls and intimidating legal correspondences. 

As the industry continues to develop better ways to balance the hospital’s and patient’s interests, the latter can consider the following options: 

  1. Payment Plans 

Experts say the simplest way to manage medical debt is to work with the provider to spread their dues over a specific period instead of an upfront lump sum. It’s also the most common, with Experian estimating that one in five patient accounts are being managed this way. 

The staggered amount generally depends on the total bill and the terms. Most nonprofit and some for-profit hospitals may even offer discounts if the patient’s barely getting by with their finances. This is a godsend for patients without coverage. 

  1. Medical Credit Cards  

Medical credit cards differ from general-purpose ones, as they’re tailored to make credit card payments for medical bills more manageable. Applying for one can be more lenient, as some medical credit card providers can accept anyone regardless of their credit rating. Also, they may not even report any outstanding debt to the Big Three. 

The main selling point of these cards is their 0% introductory rate, which usually lasts from 6 to 18 months, depending on the provider. However, they operate on deferred interest, similar to regular credit cards. A holder that doesn’t settle their medical debt within the introductory period can see their dues skyrocket due to interest rates shooting up. 

Due to this risk, experts don’t always recommend applying for a medical credit card. But it’s a decent option if the hospital doesn’t accept payment plans (which, as explained earlier, is a rarity), or you can settle the debt before the introductory period ends. 

  1. Medical Bill Advocacy 

Reviewing medical bills is always good advice, given that experts believe four out of five bills contain egregious errors. But when there are too many bills to track, it doesn’t hurt to get a professional to help—in this case, a medical bill advocate. 

Medical bill advocacy is an industry that arose from the proliferation of erroneous medical bills. Besides ensuring the bill’s accuracy, medical bill advocates dispute errors with health insurance companies and negotiate to reduce bills on the patient’s behalf. These professionals can be attached to hospitals, insurance companies, nonprofits, or state programs. 

Advocates typically offer free consultations but can charge when they start working on the patient’s case. The four most common payment arrangements include hourly, per project, a retainer fee, and percentage of savings yielded. 

  1. Income-Driven Hardship Plan 

An income-driven hardship plan is usually reserved for patients whose financial situation is borderline hopeless. In this case, they may have to redirect their limited finances from other expenses to medical ones, significantly affecting their quality of life. 

Because patients won’t be able to pay either way, some hospitals may elect to forgive a part of a patient’s medical debt. Others provide plans that break down the payments into smaller portions than standard payment plans. 

In spite of these differences, these options all have one thing in common: they require the patient to hold their end of the bargain. Hospitals and, to an extent, insurance companies go out of their way to make settling medical debt easier. Such decisions may even result in losses on their part, so it would be wise to use the opportunity sensibly. 

Wrapping Up 

Initially, medical debt won’t impact credit scores, provided the patient can settle it by any legal means. But when the debt reaches the collector, it can appear on the credit report and stay there for as long as it remains unpaid, recent changes notwithstanding. The more medical debt piles up on the report, the more difficult it’ll be to secure much-needed loans. 

While hospitals undeniably need to make a profit, they also understand that medical emergencies and treatment don’t wait for anyone to save enough. The best way to settle medical debt is still to pay on time and in full, but other cost-friendly means exist. Take advantage of any of these means to prevent medical debt from impacting your credit score in the long run.