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Unpaid Medical Bills Could Be Dragging Down Your Credit Score

Anyone who’s ever experienced a serious illness or injury knows that those doctor bills can really add up, especially if you don’t have insurance. Working out a payment plan can keep the debt collectors at bay but if you’ve racked up thousands of dollars in medical debt it could take years to pay off. In the meantime, those hefty medical bills could be slowly destroying your credit score.

Unfair Penalties

According to a new analysis from the Consumer Financial Protection Bureau, current credit scoring models are putting too much weight on medical debt. The result is that unsuspecting consumers are effectively being unfairly penalized for owing outstanding medical bills.

The consumer watchdog group examined the credit histories of 5 million anonymous consumers over a two-year period beginning in September 2011. Researchers focused on individual payment patterns to determine to what extent someone’s credit score predicts the likelihood that they will repay a debt.

The findings show that people with medical debt are just as likely to pay their bills as people with higher credit scores. Those with medical bills in collections are also more likely to pay off all their other debt compared to borrowers with similar scores who had no medical debt at all.

When it comes to default rates, consumers with identical credit scores were equally likely to skip out on a payment regardless of whether or not they owed medical debt. The agency’s conclusion? Outstanding medical bills are not necessarily an accurate reflection of someone’s creditworthiness.

According to the study, having an outstanding medical debt penalized credit scores by up to 10 points more than necessary. Consumers with a paid-off medical collection account on their credit history saw their scores penalized by 22 points more than necessary. Collection accounts are particularly damaging to your score, since they remain on your credit report for seven years.

The problem, according to the CFPB, is that credit bureaus typically don’t make a distinction between medical debts and things like credit card debts or loans when calculating credit scores. In many cases, consumers may not even be aware that they owe an outstanding doctor bill until the debt collectors come calling. By the time the problem is addressed, the damage has already been done.

In its report, the bureau recommends that credit reporting agencies treat medical bills differently to minimize the effect these debts have on credit scores. The agency suggests that doing so would result in more accurate scores that actually reflect an individual’s creditworthiness and risk level.

The CFPB has authority to set rules for credit bureaus and debt collection agencies, including the regulation of credit scoring practices. For the time being, however, the agency says it’s simply trying to offer guidance as to how medical debt should be treated going forward.

What Might Change

Currently, there’s a piece of legislation pending that would require credit bureaus to remove medical debt from credit reports within 45 days after the bills are paid. The Medical Debt Responsibility Act was introduced in 2013 by Rep. Maxine Waters (D-Calif.) but Congress has yet to take any further action. In light of the CFPB’s report, Rep. Waters is now calling for the House Financial Services Committee to hold a hearing on the issue and review the pending bill.

If Congress decides to move forward with the legislation, it could have a significant impact on the millions of Americans who currently owe outstanding medical debt. According to the Federal Reserve, medical bills account for more than half of all collections debt that appear on consumer credit reports. Changing the way medical debt is viewed for credit score calculations could make it much easier for consumers to get approved for new loans or lines of credit going forward.

Photo Credit: flickr

Rebecca Lake Rebecca Lake has been writing about the nuts and bolts of personal finance for nearly a decade. She is an expert in investing, retirement and home buying topics. Her work has been featured on The Huffington Post, Business Insider, CBS News, U.S. News & World Report and Investopedia. As a homeschooling mom of two, she's always looking for ways to make the most of every dollar.
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