Most Paid Medical Debt Is About To Be Removed From Credit Reports: Here's What's Changed

As much as 70% of medical collection debt is being removed from consumer credit reports.

medical bill disappearing and revealing 800 credit score
Photo: Alex Sandoval

Medical debt is no small burden for Americans. A study conducted by Debt.com found that in 2021, 50% of Americans had medical debt, which was an increase from 2020 when the figure was 46%. As the study pointed out, Americans face significant struggles paying medical bills.

It is precisely because of these sorts of daunting figures that a recent announcement from the country's three biggest credit bureaus was welcome and important news: Equifax, TransUnion, and Experian are making substantial changes to their medical debt reporting procedures that will result in nearly 70% of medical collection debt being removed from consumer credit reports.

In addition to the sheer number of individuals whose credit reports stand to be improved, the new policy is particularly meaningful on the heels of a global pandemic that triggered monumental healthcare-related expenses.

As of June 2021, around 43 million Americans had medical bills on their credit report, according to the Consumer Financial Protection Bureau. And according to groundbreaking research from a Stanford economist that was published in The Journal of the American Medical Association, though initial estimates pegged outstanding medical debt held by Americans at about $81 billion, the reality is that the true figure is likely as high as $140 billion.

"These [credit reporting] changes will help bring relief to millions of Americans, as medical debt has mounted over the last few years and has affected every demographic," Colleen McCreary, chief people officer and financial advocate at Credit Karma, told Health.com "Medical debt is stressful enough as it is, and to have a more forgiving system on credit reports will give consumers some much-needed peace of mind."

Here's a breakdown of the new credit reporting policies and the ramifications for Americans with medical debt.

Paid Medical Debts Eliminated from Credit Reports and Increased Timelines to Resolve Debt

There are a variety of notable changes included in the overhaul of the medical debt reporting policies just announced by the three consumer credit bureaus.

To begin with, effective July 1, paid medical collection debt will no longer be included on consumer credit reports. In other words, if you had an overdue medical bill that was sent to a collection agency and also added to your credit profile, the collection action is going to be removed your credit profile if the bill has been paid off.

This single change is incredibly important because, as already noted, some 43 million Americans have medical bills on their credit profile.

In addition, the grace period before which unpaid medical collection debt will be added to a consumer's report will be increased from six months to one year, giving consumers double the amount of time to work with insurance or healthcare providers to address their debt before it impacts their credit score. Finally, in the first half of 2023, Equifax, Experian, and TransUnion will also no longer include medical collection debt of $500 or less on credit reports.

The cumulative effect of these changes is meaningful.

"This will be a welcome change for consumers given that when it's sent to collections, medical debt can have a substantial negative impact on consumers' credit scores and can remain on their report for up to seven years," explained McCreary.

Combined, the multi-pronged changes will positively impact the creditworthiness of many Americans, McCreary added. "These changes were put in place to help consumers at a time when medical debt is at an all-time high," she added. "The changes ultimately mean that many Americans' credit scores will go up, which can help make it easier for them to borrow money and get more favorable terms down the road."

What Does the New Policy Mean for Consumers' Long-Term Financial Health?

Perhaps the most noteworthy impact of the new policy announced by the three consumer credit reporting agencies is the ability for consumers to improve their credit profile more quickly and not be financially damaged for years upon years by medical debt—particularly at a time when Americans are struggling with the fallout from COVID-19, while simultaneously dealing with skyrocketing healthcare costs.

The most significant change is that paid medical collection debt will no longer be included on your credit profile. Credit literacy coach and educator, Markia Brown told Health.com that this allows individuals who have been impacted by medical debt being in collections (even after they've paid the balance) the opportunity to recapture points that they lost from their credit score.

"If the debt has gone to collections and then is paid, it's at the creditor's discretion if they want to continue to report it or not," Brown said. "Some creditors [historically] choose to keep reporting as sort of a penalty against the consumer for not paying the debt initially."

In the past, medical collections stayed on an individual's credit report for up to seven years from the date the bill became delinquent, according to Credit Karma. And even after the debt was paid off, it could still be challenging to get the collections report removed from your credit profile (doing so often involved filing a dispute.) All the while, the lingering collection incident on your credit profile would drag down your credit score.

Now, the patient won't bear the full burden of responsibility for navigating America's confusing and complicated health care and credit reporting system. And even better, a minor credit report blemish for a medical bill that has been paid, will no longer remain on your credit profile for years–standing in the way of obtaining everything from an affordable mortgage to a lease agreement, or an auto loan.

Is This a Sign That Medical Debt Forgiveness Is on the Horizon?

While these changes are exciting and noteworthy, they aren't exactly a free pass to ignore medical bills altogether or a sign that full-scale medical debt forgiveness is coming next.

McCreary, of CreditKarma, said people should still focus on paying off outstanding debt, and added that "consumers should have a plan to pay off their debts as best they can."

It's also still important to get ahead of potential medical debt by proactively asking providers and health insurance companies for a good faith estimate of costs or an explanation of benefits before any optional or non-emergency treatments are given. This provides you as the consumer the opportunity to shop around for more affordable care before being hit with an outsized or unexpected bill.

Non-emergency care should also be taken care of with providers who are in-network and thus not likely to incur as much expense. (As part of the No Surprises Act of 2022, patients have every right to request an in-network provider and have that request be honored.)

Finally, it's also a good idea to keep payment records, have a repayment plan that allows you to stay on top of your bills, and take preemptive action before it reaches your credit report.

Healthcare Ramifications of the Credit Report Changes

The new changes announced by America's credit reporting agencies are important because, as the Kaiser Family Foundation reported, "despite over 90% of the United States population having some form of health insurance, medical debt remains a persistent problem." The same report noted that for individuals and families who get by on limited income, "even a relatively small unexpected medical expense can be unaffordable."

But equally importantly, financial issues and health issues are so often inextricably intertwined. Survey data from the U.S. Census Bureau shows that households with members in fair or poor health were also more likely to suffer high medical debt burden. The Kaiser Family Foundation also reveals that people with medical debt, or at risk of accumulating medical debt, may also forgo needed medical care or treatment entirely.

The last thing a sick person should be worrying about during a moment of need is how much a critical or life-saving treatment will cost them or how the resulting debt could interrupt their ability to get well and get back on their feet over the long term.

"With America being one of the most expensive countries when it comes to healthcare, these changes will enable millions of Americans to live better lives due to the increases in their credit scores and their creditworthiness," Brown said.

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