Impact of Medical Debt on Credit

Within the U.S. financial system, credit is the ability to borrow money to access goods or services with the understanding that the borrower will pay it back later. Credit unions, banks, and other lenders issue credit to people who want to obtain something now, but either can’t or don’t want to pay for it now. Before someone is granted any credit, lenders determine the borrower’s creditworthiness, or how likely they are to pay the money back in full and on time. Creditworthiness is represented by a credit score, which is a number between 300 and 850. The higher the score, the better one’s creditworthiness. One example of something that negatively impacts credit scores is unpaid medical bills that have gone to collections. However, a coming change to medical debt will lessen the burden for many.

Starting July 1, 2022, medical debt that’s been paid will no longer be included on credit reports from Equifax, Experian, or TransUnion. These are the three largest credit bureaus, with each playing a role in determining people’s credit scores. Historically, medical debt that has gone to collections remains on people’s credit reports for up to seven years––even if the debt is paid off. Unpaid bills are sent to collections after the original lender decides it’s unlikely the borrower will pay back the debt. The time it takes for debt to be sent to collections varies, but six months is a general guideline. After a debt has gone to collections, the borrower’s credit score will be negatively impacted––for up to seven years. The lower someone’s credit score is, the more trouble they will have in getting a loan. If they do get a loan, they may have to pay more in interest. They may also experience some struggles in getting a job or renting an apartment, as employers and landlords often reference credit scores to determine whether a person is trustworthy.

However, medical debt that has been paid off will no longer be included on credit reports for seven years after July 1, 2022––even if it has gone to collections. As soon as it is paid, the delinquency will be immediately removed from credit reports. This will help boost people’s scores and better help them on their journey to achieving financial success.

Also starting in July, people with unpaid medical debt won’t have their delinquencies added to their credit report until a year after the debt was sent to collections. This will give them more time to pay it off before it starts influencing their credit score. If it’s still unpaid after a year, it will be reported. However, it can still be removed after payment instead of lingering for seven years.

While those changes are taking effect starting July 1, 2022, there is another change that isn’t being implemented until the first half of 2023. Starting next year, new medical debt under $500 won’t be added to credit reports at all, regardless of whether it goes to collections or not. In a joint statement, the CEOs of Equifax, Experian, and TransUnion said, “Medical collections debt often arises from unforeseen medical circumstances. These changes are another step we’re taking together to help people across the United States focus on their financial and personal wellbeing. As an industry, we remain committed to helping drive fair and affordable access to credit for all consumers.”

While these soon coming changes lessen the burden of medical debt, it doesn’t eliminate it. People should aim to build up an emergency fund to pay for unexpected expenses, including unforeseen medical bills. A good rule of thumb is to save away three to six months’ worth of expenses. However, if people can’t afford to do that, they should save away whatever they can. Any amount helps and can be the difference in maintaining a positive credit standing.

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