Prevent Medical Bills From Bruising Credit

Medical bills that wind up in collections hurt your credit scores more than they should.

That was the conclusion the Consumer Financial Protection Bureau reached after studying 5 million credit reports. The federal regulator tracked how well credit scores predicted people's future creditworthiness after medical bills showed up on their reports.

The answer: Not that well. The CFPB says people with medical collections generally paid their other obligations on par with those whose credit scores were 10 points higher. And those who paid off their medical collections should have received scores 16 to 22 points higher on average.

Small Changes to Scoring on the Margins

The study didn't receive much pushback from the credit scoring industry. FICO, creator of the leading score, noted that its latest version of the formula ignores small collection accounts and that the next version, to be released this year, will use "a more nuanced approach to assessing consumer collection data" and that "medical collections will have a smaller impact than nonmedical collections," according to spokesman Anthony Sprauve.

You shouldn't rely on these reassurances to protect your credit scores from medical debt, however. Most lenders use older versions of the FICO formula that don't have these upgrades, and it's uncertain how many will adopt the new score when it comes out. A rival formula that already ignores paid collections, the VantageScore, isn't widely used by lenders.

Keep Medical Bills from Ruining Credit

That's why you need to take an active role to ensure a medical bill doesn't trash your credit. Here's what to do:

Bird-dog your medical bills: Don't assume a doctor or hospital bill will get paid just because it has been submitted to your insurer. Read every medical bill you're sent and every "explanation of benefits" your insurer provides. If a bill is unpaid after a month or so, call up both the medical provider and your insurer to see what's going on and what you can do to cut the red tape. Follow up with monthly or even weekly calls to make sure the bill gets paid. In extreme standoffs, you may want to pay the debt yourself and seek reimbursement from the insurer rather than letting the account go to collections.
Get ahead of collections: If you can't pay a bill outright, contact the medical provider to work out a payment plan. (Avoid charging medical bills to a credit card, though, since medical providers typically don't charge interest and credit cards do.) If a bill has already been turned over to collections, ask the medical provider to take the account back in exchange for payments.
Seek help: If your bills are overwhelming, ask your medical providers if you qualify for financial assistance or other discounts. In a worst-case scenario, consider bankruptcy. A Chapter 7 bankruptcy remains on your credit report for up to 10 years, but it at least would legally erase medical bills that might plague you for even longer.