Medical Debt

Medical Debt
Mark CappelJun 24, 2013
Key Takeaways:
  • FICO does not differentiate between paid and unpaid delinquent debts.
  • 1 in 10 medical claims have errors.
  • Consumers with lower credit scores pay higher rates and fees for loans.

Proposed Federal Law Would Remove Settled Medical Debts From Credit Reports

One frustration consumers have after paying off their delinquent medical bills is that they must wait for several years before the damage to their credit scores wear off. What’s doubly frustrating is the delinquency is often not consumers’ fault — oftentimes the late payment is the result of a billing error or dispute between the service provider and insurance company. Although the consumer may resolve dispute, the damage to their credit report and score is done.

That may change if the Medical Debt Responsibility Act of 2013 becomes a federal law. If passed, law would require consumer credit reporting agencies, including Equifax, Experian, and TransUnion, to remove resolved but formerly delinquent medical accounts from credit reports.

The bill would amend the Fair Credit Reporting Act (FCRA), which is the Federal law that sets the rules consumer credit reporting agencies must follow. This would allow a federally mandated "pay for delete" for consumers, as all they’d need to do to remove the negative account is pay or settle the debt with whoever owns the rights to the account.

Quick Tip

According to a June 2013 NerdWallet Health report, medical bills will push 1.7 million U.S. households into bankruptcy in 2013, the largest cause of bankruptcy filings.

A Second Try For The Medical Debt Responsibility Act

A similar bill was introduced in 2011, but applied to settled medical collections totaling less than $2,500.

Why is this a problem? According to the American Medical Association’s fifth annual National Health Insurer Report Card, 1 in 10 medical claims in 2012 contained an error. Because Fair Isaac & Co.’s FICO score does not differentiate between resolved and unpaid debts and FICO is used by virtually all mortgage and automobile lenders, a delinquent medical bill can mean the difference between a low and high rate on a future loan. (By contrast, VantageScore 3.0, introduced in the Spring of 2013, removes the penalty for a delinquent account when the consumer resolves it.)

Rep. Maxine Waters (D-Calif.) introduced the Medical Debt Responsibility Act in the House of Representatives, and Senator Jeff Merkley (D-Ore.) proposed a similar bill in the Senate. The Web site Govtrack.us gives the law a 1% chance of being enacted.

Bills Action Plan

If you have a recent collection account on your credit report that is dragging your credit score down, negotiate a settlement with the creditor. Then, focus on the seven activities that can improve your credit score.

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