You check your credit score, expecting to see your regular 700+ number, but then your stomach sinks. What could possibly have caused it to drop down to 620? You paid your student loans, credit card bills, auto loan and mortgage this month — as you do every month. This just doesn’t make sense! You quickly pull a credit report and find there’s an item in collections — a medical bill. A medical bill you didn’t even know you owed.
The Problem With Medical Debt
Medical debt in collections is a huge anchor on Americans’ credit scores. A 2014 study from the Consumer Financial Protection Bureau, or CFPB, found that 52 percent of debt on credit reports is from medical expenses, with an average balance of $579.
The study also found that 1 in every 5 credit reports had an item in collections, meaning it’s impacting 43 million Americans, and 15 million of those people only had medical debt in collections.
This is important because it points to a few big threats for consumers.
Insurance is confusing; the billing process from a doctor’s office can be lackluster; collections agencies also have been known to make no effort to collect the debt before putting it on a credit report. This means it isn’t uncommon for people to see an item end up in collections without ever being alerted to the debt.
[See: 12 Simple Ways to Raise Your Credit Score.]
Isn’t Medical Debt Having Less Impact on Credit Scores?
Around the same time the CFPB released its report, FICO announced it would be launching FICO 9 — a new credit-scoring model. One of the perks of this new model is that it would reduce the impact that medical debts have on a credit score. It’s also not supposed to consider any debts under $100, which would be a great help to those who experience tiny bills from the doctor’s office going to collections.
This could stand to really benefit millions of Americans, but unfortunately, lenders aren’t required to use FICO 9. Plenty of lenders even have proprietary credit scoring models they use in-house.
This means your medical debt in collections will likely continue to be anchor on your score for the near future.
[See: 50 Ways to Improve Your Finances in 2016.]
If you’ve never had to tussle with medical debt in collections, then there’s an easy plan to make sure it never happens.
4 Simple Steps to Prevent Medical Bills From Going to Collections
As with much of your financial life, protecting a credit report and score should be proactive instead of reactive. These four steps can help you keep medical debt out of collections.
Step 1: Ensure the doctor has your proper address. Take a moment to double-check the information your doctor’s office has on file and ensure your mailing address is correct, especially if you moved recently. The change of address form with your post office is not always going to guarantee mail is rerouted.
Step 2: Set reminders to follow up. Don’t trust the doctor’s billing office to act in your best interest and alert you when a bill is due or even overdue. Set reminders on your phone or written in your trusty planner to follow up with the doctor’s office 30 days after the appointment if you haven’t received a bill. Keep following up every 15 to 30 days to see if there’s an outstanding balance.
Step 3: Understand how your insurance works. This task may be a monumental undertaking for many, but at the very least, you need to understand your deductible, your copays and whether the appointment you had should be covered entirely on your plan.
Step 4: Work out a payment plan. Of course, sometimes medical debt goes to collections because the bill is just too big to handle and you’re unable to pay it. Instead of ignoring the debt until it gets sold to collections, try to work out a payment plan with your doctor’s office or the hospital. Ask for an itemized copy of the bill and check for any errors or issues with overcharging. You may also be able to find charitable assistance if you suffer from a chronic or life-threatening illness.
Resolving the Issue
Once the debt is in collections and hits your credit report, you have limited options other than to pay it off and/or wait for it to fall off the report in seven years. If you’re able to make a payment, don’t hesitate to negotiate with the collections agency. Collectors buy debt for pennies on the dollar. That means if you’re willing to make a lump-sum payment, then you can probably pay off the debt for much less than what’s owed and have it marked as paid on your credit report. It certainly doesn’t hurt to ask.
[See: Answers to 7 Burning Tax Questions.]
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Beware the Biggest Threat to Your Credit Score originally appeared on usnews.com
