The New Rules for Medical Debt on Your Credit Report


Credit Score, Debt, Insurance


April 14, 2022

I recently wrote to you about the very good news that consumers no longer have to worry about "surprise" medical bills for unavoidable out-of-network medical care.

But that doesn't mean medical care has become affordable. There are still deductibles and copays to deal with.

The Consumer Finance Protection Bureau (CFPB) just issued a new report that estimates that there was at least $88 billion in unpaid medical bills in 2021. Unpaid medical debt can pull down credit scores once it shows up on a credit report as having been sent to a debt collection agency. Which is a big problem. The CFPB estimates that more than half the debt reported as being in collections on credit reports is medical debt.

The CFPB said "enough". Noting that struggling with an unexpected (and involuntary) large out-of-pocket medical cost is not a window into someone's credit-worthiness, the CFPB has effectively nudged the three main credit bureaus--Equifax, Experian and Transunion--to revamp how they treat medical debt.

The new rules will protect many households going forward, but there's also a big change that will help households with an old medical debt ding on their credit reports despite having eventually settled the bill.

Here's the good news on medical debt and your credit report.

  • Debt that was paid off after going to collections will not show up on your credit report.

The most popular FICO credit scoring algorithm is unforgiving about medical debt. If a medical debt was sent to collections and remained unpaid for 180 days, it would show up on your credit report. And that ding stayed on your credit report for seven years, even if you managed to eventually pay the bill.

Beginning July 1, the credit bureaus will wipe out any mention of medical debt once it is repaid. The credit bureaus expect this one move will eliminate nearly 70% of the medical debt problems on credit reports.

  • There will be a one-year grace period to resolve unpaid bills.

The current rule is that once an unpaid medical bill is sent to a collection agency, the consumer still has another 180 days before it shows up as a negative mark on their credit report.

Beginning July 1, that grace period will be extended to one year. That's a bit of breathing room to hash things out with your insurer, or work out a payment schedule with the care provider, or look for savings opportunities elsewhere in your household spending so you can get the bill paid off.

  • Unpaid medical bills below $500 will not be tracked on your credit report.

Beginning sometime in the first half of 2023, the credit bureaus will stop reporting small unpaid bills that have been sent to collections.

While I think we can all agree a medical system that doesn't impose crushing bills on households would be the best fix, we're all stuck navigating the system we have. This change in how medical debt will impact credit scores doesn't address the insane cost of care, but it will at least eliminate the credit score impact for many households.

The CFPB report highlighted that most medical debt in collections was for less than $500. As I just shared, those "small" bills will no longer show up on credit reports starting in early 2023. But at the same time, I know it is no one's desire to have an unpaid bill, regardless of whether it hurts one's credit or not. And that's where your emergency savings fund can make all the difference in covering medical bills of less than $500 or so.

Suze's Financial Strength Test

Answer Yes or No to the follow statements.

I pay all my credit card bills in full each month.

I have an eight-month emergency savings fund separate from my checking or other bank accounts.

The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!

I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.

I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.

I have term life insurance to provide protection to those who are dependent on my income.

I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.

I have checked all the beneficiaries of every investment account and insurance policy within the past year.

So how did you do?

If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.

As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!

But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.

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