Freedom Financial Has Advice for Debtors with Medical Bills

When life-saving decisions must be made quickly in the face of an emergency, the long-term financial implications of those actions are far from your mind. Add to that the lack of transparency in medical costs, and you could be slapped with medical bills that you’re unable to pay.

But the financial pain goes beyond the initial bill. Unpaid medical debt or late payments on medical debt could go to collections and affect your credit report. At Freedom Financial, we’ve worked with many debtors who didn’t know how medical debt would affect their credit and, more importantly, how they could deal with those effects. 

While the high cost of medical services, especially emergencies, is difficult to avoid, you could reduce the effect that medical debt has on your credit by being aware of how creditors treat medical bills. We’ll go over the process so you might spend more time getting healthy, and less time under the mountain of debt.

How Unpaid Medical Debt Affects Your Credit Score

The severity of a medical debt’s effect on your credit score may vary depending on several factors. First, it depends on whether your medical service provider (i.e. doctor, surgeon, dentist, etc.) reports your unpaid bill or late payment to one of the major credit bureaus.

Small medical offices are less likely than large hospitals to report the debt, but either one could technically report the late or unpaid debt. However, any time a hospital or medical office contracts with a collection agency, your unpaid or late debt will be reported and it will affect your credit score.

Because payment history makes up 35% of your credit score, a missed payment looks very bad on your credit history. With poor credit, lenders and credit card companies will either deny your applications or charge you a higher rate of interest.

New Credit Scoring System is Good News (and Bad) for Medical Debtors

FICO is the most popular credit scoring system among lenders in the United States. And FICO has recently changed its scoring models to be more lenient on unpaid medical bills. But it’s not all good news.

The old scoring models that FICO used didn’t distinguish between unpaid medical bills and unpaid debt incurred from irresponsible spending. This means someone who experienced a medical hardship and couldn’t pay their bills was treated the same (in terms of credit score) as someone who didn’t pay their bills for an extravagant vacation. 

Now the bad news. Many lenders aren’t using the new system. And, according to Kevin Gallegos, Vice President of Freedom Financial Network, if you use a credit card to pay medical bills, you’ll lose the protection of FICO’s new system.

Gallegos of Freedom Financial goes on to say that, “If you had a medical bill that was 2 months late and went to collections and you paid it, the bill would still count as unpaid in your credit score.” But now, Gallegos says, “the score will treat paid bills as paid bills.”

Negotiate or Wait (Seven Years)

A collection event will stay on your credit report for a maximum of seven years. If you’re able to live with a penalized credit score for seven years, it may be worth it to wait for your credit score to improve.

If you’re unable to make it by with poor credit, it may benefit you to work with the collection agency. They’ve usually purchased the debt for a fraction of the actual value of the debt. You may be able to work with them, or get a company like Freedom Financial to do so on your behalf.

In some cases, consumers could avoid the collection being reported to their credit score by negotiating a debt repayment plan. The collection agency understands that once the debt is reported, you have much less of an incentive to pay off your debt. So you may be able to avoid a significant hit to your credit score if you can negotiate a settlement.

Additionally, if you have several unpaid bills—some old, some newer—you’re better off paying the most recent ones first. That might seem counterintuitive, but credit reports weigh recent collections more severely than old collections.

Contest the Debt and Act Fast

If you’ve been notified about an unpaid medical debt, report to the credit bureaus to ensure everything is accurate. The collection agency will receive a request for information from the credit bureaus, and if they don’t respond within 30 days, your unpaid account will be taken off your credit history.

The best thing you can do, in any case, is to act fast. Especially when you first receive a medical bill that you can’t pay. Call your doctor’s office or hospital and tell them your situation.

Facing down collections and unpaid debt can be intimidating, but there are often things you can do. Do your research, but don’t be afraid to ask for help. Address problems early and try to find leeway before things get out of control.