Do Medical Bills Affect Your Credit?
Our clients often ask, “Do medical bills affect your credit?”
Unfortunately, the answer is yes.
Medical bills go on your credit report when they aren’t paid within 90 days. The hospital or physician sends the account to an in-house late payment department or an outside collection agency. And your credit score could drop by 50 to 150 points.
It doesn’t matter whether you were making payments or not.
And duplicate health insurance notifications confuse the situation even more. It takes a trained billing expert to decipher what you owe.
In fact, lots of people don’t know they have an outstanding doctor or hospital bill until they get a collections notice.
That’s why more than half of all collection accounts are outstanding medical bills.
And collection agencies report medical accounts to credit bureaus for 7.5 years. That’s longer than a bankruptcy.
New Laws Designed to Protect Patients’ Rights
Our lawmakers know that the number one cause of bankruptcy is a medical emergency.
These are good people who had good credit all their lives.
The problem is skyrocketing health care costs, combined with a health insurance system that doesn’t cover all the expenses. You could easily owe tens of thousands of dollars for an emergency room visit, when the procedures are billed out at hundreds of thousands of dollars.
That’s why Congress passed new laws in 2022 to protect us from the negative effects of medical bills.
Do the New Laws Have Teeth?
These new laws were supposed to remove medical debt from credit bureau reports.
Unfortunately, when you dig into the detail, these laws mostly just look good on paper and sound good during a political press conference.
The new laws won’t remove a medically-related collection account or bankruptcy from your report.
Here are two ways the laws could potentially help:
- You can petition the credit bureaus to remove a collection account after the balance is paid in full. This change isn’t an improvement compared to existing laws. Most reputable collection agencies already stop reporting to credit bureaus after the balance is paid, regardless of whether the bill was medical, a credit card, or a car loan.
- You can petition the credit bureaus to remove a collection account when the bill is less than $500. Unfortunately, the vast number of medical bills are much higher than $500, so the new law only affects a tiny number of accounts.
180-Day Rule May Help
An unrelated rule that could help is called the 180-Day Rule.
This consumer protection regulation requires credit bureaus to wait 180 days before they report outstanding medical bills to the credit bureaus. This rule doubles the amount of time consumers can take to settle an invoice before it negatively affects their credit rating.
An Ounce of Prevention Is Worth a Pound of Cure
The only way to avoid negative credit issues is to pay medical bills in full within 90 days.
Scroll down to learn more about these five payment options:
- low interest credit card
- low interest balance transfer
- medical expenses credit card
- personal consolidation loan
- home equity line of credit (not recommended)
Here are some additional steps you can take.
Always check your medical bills to make sure everything is absolutely correct. Computerized billing, that relies on medical code numbers instead of language, is notorious for duplicate charges and other assorted mistakes. Plus, health insurance companies are notorious for denying claims on the first pass. You must dispute any inaccuracies or any declines right away.
Search for government programs that help people pay medical expenses. Most hospitals have a social services team that knows what options are available in your state.
Consider a credit repair company to try to remove these negative items from your credit bureau report.
Stay on top of your credit score by reviewing your credit report once a month. Check out our article on the Best Free Credit Reports. It includes reviews on the top 3 free credit bureau reports, and it tells you which ones to avoid.
Credit Cards & Balance Transfers
Do you have a credit card with a low interest rate and high credit limit?
Use this card to cover your medical bills, and then pay the credit card balance over the next 6-12 months. The banks will allow you to take as long as you need, but you’ll pay less interest when you pay it off faster. It’s tempting to send the monthly minimum, but you could end up paying for years and incurring substantial interest.
Consider getting a few low interest rate credit cards for this kind of emergency. Make sure the card has no annual fee and a substantial credit limit that’s at least several thousand dollars. Put the card in your sock drawer, but use it a few times during the year to keep the account active. In this way, you’ll have fast access to credit when there’s an emergency.
Another option is a credit card balance transfer with 0% introductory APR for 12-18 months.
Check the fine print before you accept a balance transfer, and make sure you understand all the fees. For example, banks normally charge a “transfer fee” that ranges from 2%-5% of the total amount of the loan. Take care to pay off the balance before the intro rate expires. Otherwise, you could pay 15%-20% APR after the intro period expires.
Personal Consolidation Loan
A personal consolidation loan has the same payment every month for a pre-determined number of months, like a car loan or mortgage.
This option protects your credit rating, provides a predictable payment schedule, and an end date to the loan.
Some lenders approve consolidation loans for credit scores as low as 580.
Here’s how it works.
You take out a loan (typically ranges from $2,000 to $50,000), pay the medical bill right away, and make payments to the lender each month. The loan is paid in full at the end of the “term” (usually 2-6 years). The interest rate can range from 6% to 35% depending on your credit score, the amount of the loan, and the number of months in the repayment schedule.
Be sure to read the fine print. Understand the interest rate, fees, and total cost of the loan before you sign the agreement.
Here are three options that don’t report applications to the credit bureaus. They only report after you sign the loan agreement.
Home Equity Line of Credit (HELOC)
It might be seem wise to leverage the equity in your home to pay medical bills. Home equity line of credit (HELOC) loans are secured by real property, so the interest rates are low.
We don’t recommend using a HELOC to pay medical bills.
Your home is your most valuable personal and financial asset.
You could lose your home if you can’t make the monthly payments.
Can a Credit Repair Company Remove Medical Bills from Credit Reports?
There are actions you can take to protect your credit rating, even if an account goes to collections.
Contact the collection agency right away. Ask them to work out a payment plan. Ask them not to report your account to the credit bureaus as long as you make the payments. And remind them of the 180-Day Rule. This consumer protection regulation gives patients 180 days (or 6 months) to pay a medical bill before it’s reported to the credit bureaus.
A reputable credit repair company can contact credit bureaus and collection agencies on your behalf, and try to clean up your credit report. Their efforts may be limited if the bureau information is accurate. However, they can look for loopholes. For example, they can request a “written verification” to confirm your bill is correct. HIPAA protects your privacy, so the collection agency is only allowed to see financial information like the amount of the bill, mailing address, and telephone number. They are not entitled to see any medical information. If the collection agency’s verification letter includes any protected medical information, then they are in breach of HIPAA Privacy Laws. This is a federal offence, and they may be willing to remove negative notations to avoid a lawsuit.
Credit repair companies cannot make guarantees. However, persistent credit repair people have a good track record with collection agencies and credit bureaus. And their credit advice will help you improve your score over time.
Summary
Do medical bills affect your credit?
Yes. 50% of all collection agency accounts are for outstanding medical bills. And it’s the number one reason people declare bankruptcy.
There are a several ways to protect your credit while you pay down these bills.
First, check all medical bills for accuracy, and challenge insurance companies when they deny a claim. Insurance companies thrive on patient procrastination.
Second, pay the outstanding balance within 90 days. Use a low interest rate credit card, a credit card balance transfer, a medical credit card offered by the medical facility (watch out for the high interest rate), or a personal loan like a consolidation loan. Never use a home equity loan to pay medical bills. The lender could foreclose on your home if you can’t cover the monthly payments.
Third, work with a credit repair company to try to get the credit bureau to remove negative notations from your report.