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Medical Debt
Mark Cappel
UpdatedFeb 26, 2024
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    2 min read
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 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.

Struggling with debt?

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Auto loan debt was $1.607 trillion and credit card was $1.129 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in Oregon, 16% have any kind of debt in collections and the median debt in collections is $1563. Medical debt is common and 5% have that in collections. The median medical debt in collections is $599.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.