September 13, 2014
Medical Debts Will Soon Weigh Less On Your Credit Score, But They're Still A Problem
Seeing a doctor should make you healthier. But what happens when the bill comes? If you are like one-third of Americans, you struggle to pay your medical bills.
The number one cause of personal bankruptcy has less to do with spendthrift habits and a great deal more to do with bad luck when it comes to your health: medical bills are the leading reason that Americans file for bankruptcy.
When patients can’t pay their bills, their credit scores suffer. This affects their ability to get credit in other parts of their lives.
Over 64 million consumers have a medical collection on their credit report, according to the credit bureau Experian. A recent change in the way credit scores are calculated could offer better financial options to millions.
How a single visit to the ER can derail your long-term financial goals
I recently met 21-year-old Jeniquia, a San Francisco woman studying to become a veterinarian. I hired Jeniquia to take me to work via peer-to-peer car service Lyft. She explained to me that she nearly didn’t get the car she now uses for her livelihood because of an unpaid $300 medical bill.
“It struck me when I went to buy a car. The dealership said I needed a cosigner,” Jeniquia told me. “I also got denied for a bunch of credit cards.” Concerned, she traced back her troubles to a trip she took the previous year to visit her mother in Utah, where she went to the emergency room for a bad sunburn.
Luckily, Jeniquia’s mother had the credit to co-sign on Jeniquia’s car lease. Without that help, Jeniquia would be without her job as a driver and thus without any financial means to pursue her education.
FICO scores set to rise for those with unpaid medical bills
Earlier this month, Fair Isaac Corp. (FICO) – the country’s most widely used credit score – announced plans to reduce the impact of medical debt on its credit-scoring model. This is great news for consumers.
The changes to FICO scoring will help millions, raising scores an average of 25 points for people who have medical debt but otherwise good history of paying bills. Because Jeniquia ultimately paid in full her $300 ER bill after it went to collections, she’ll find that her new FICO score will no longer be affected by that debt. Past paid medical debts do not factor into the new scores. Unpaid debts will weigh less.
“Many consumers have medical debt, and we’ve found that this does not necessarily indicate an unlikeliness to repay other debts,” Anthony Sprauve, FICO’s director of public relations, told NerdWallet. “Giving less weight to unpaid medical bills in collection — which, by the way, are more than 50% of all unpaid collection debt — is a way to possibly increase the chances of someone who is otherwise a good credit risk getting a loan.”
This means that FICO scores will distinguish between medical and non-medical debt, suggesting the credit world is taking steps to recognize a $300 emergency room bill after a bad day in the sun is different than chronic overspending on a credit card.
High health care costs are causing American families to go broke
Although consumers like Jeniquia stand to benefit from FICO’s new scoring model, skyrocketing health care costs are still hitting millions of Americans with crippling debt. According to a recent Commonwealth Fund report, 28 million American adults burned through their savings to pay off medical expense in the last two years.
Unfortunately, health insurance is no panacea. Last year 10 million insured Americans struggled to pay bills, according to our research at NerdWallet. With high deductible plans on the rise, that number may continue to increase. The maximum out-of-pocket charge for Affordable Care Act plans sold through the government marketplace was set at $6,350 for 2014. That’s on top of monthly insurance premiums. I bet that doesn’t feel “affordable” to too many people.
When faced with steep medical bills, many Americans turn to easy credit. Each year more than 11 million adults use credit cards to pay off medical bills. However, under the new FICO rules this could be a big mistake. Those who pay off medical debt using credit cards may lose FICO’s new medical bill protection. Once your debt is paid and owed to your credit card provider, how will FICO distinguish whether your debt was from a hospital, a trip to Disney Land or happy hour drinks at TGIFridays?
Consumers need more financial literacy when it comes to healthcare costs
In this environment, consumers need to be strong, proactive advocates in understanding their health care costs and obligations. But first, we need to empower consumers with increased financial literacy in order to manage their health expenses.
The signs are far from encouraging. Companies assisting the rollout of Affordable Care Act report that “most consumers who sought help struggled to understand even basic health insurance terms such as ‘deductible’,” according to a survey last month by Kaiser.
Jeniquia herself laments, “I thought the hospital visits were covered,” she says. “Nothing was explained to me.”