As if dealing with medical debt wasn’t hard enough, recent news shows that it may be even harder to deal with than previously thought. In a surprising, even ironic, twist on credit score bureaus’ attempt to treat people equally, this equal treatment means a huge drop in the scores of those with medical debt.
How can equal treatment lead to a lower credit score? Simply put, medical debt typically comes on fast and it comes at a cost exponentially greater than any other type of debt. On a simple credit scoring model or sheet of paper, medical debt can paint a picture of someone who’s deeper in debt than they can reasonably get out of – and possibly that it happened due to a mismanagement of their money.
Of course, given the unexpected nature of medical emergencies and illnesses, that’s simply an unfair judgement of people carrying medical debt. This is a judgement that can lead to years of struggle in pulling up their score and money lost in higher interest charges on everything that requires a credit check prior to purchase. Below we’ll talk about how this came to be and what someone with medical debt can do to recover their score.
How Judging All Debt Equally Leads to Unfair Credit Scoring
At first thought, it makes sense to treat all debt equally. Why should someone with credit card debt have a different score than someone with student loan debt? The problem is, debt happens for very different reasons and medical debt is often the most unexpected of them all.
One day you can be chugging along with low credit card usage and pretty good control over student loans. You may even have a solid emergency fund in place as well. Then a medical emergency or illness strikes and your finances change overnight.
Carrying medical debt is difficult enough to deal with, given the cost of even the simplest of medical treatments. The drop in one’s credit score is an even bigger kick to the gut. The Consumerist talks about how this came to be:
“The CFPB examined approximately 5 million credit records from two time periods, September 2011 and September 2013, to determine how well a common credit score could predict a consumer’s likelihood of paying future debt.
The report found that credit scores may underestimate the creditworthiness by 10 points for consumers who owe medical debt. Because current models treat medical and non-medical debt, such as unpaid rent, that goes to collection the same way consumers are often overly penalized…
Additionally, the study found that credit scoring models, which do not account for repayment of medical debts in collections, may underestimate consumers’ creditworthiness up to 22 points after medical debts are paid.
The study found that consumers who subsequently paid medical debt that had gone into collections were more likely to pay back their debts, on par with consumers with scores 16 to 22 points higher.”
In other words, those with medical debt are proven to be responsible with their debt repayment, but their score is still impacted due to the sheer size of the debt. Whereas if medical debt were scored differently to account for the fact that it doesn’t prove a consumer to be un-credit worthy, almost like a score on a curve, then borrowers would have a chance to repay their debt without being penalized or marked as a credit risk.
To make matters worse, there’s the factor of added expenses due to higher scores (in the form of higher interest rates given to those with lower scores – from mortgages to credit cards to higher prices on basic needs and even an impact on your employability) and the factor of mistakes in medical billing. The Consumerist points out that it is not uncommon for someone to have paid on their medical bills, only to find later that the payment never got recorded and that the debt was sent to collections. For someone in this situation, there score can still take years to recover, even after it’s been resolved.
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How Those with Medical Debt Can Repair Their Credit Scores
Unfortunately, there’s no fast and easy way to rebuild a credit score. It can take six months to a year or more to see any improvement – and that’s after consistent credit repair behavior. While it can’t be changed overnight, medical debt holders can recover their scores over time by following these steps:
Create a sustainable payment plan. An often unspoken mistake of debt payoff is creating goals too aggressive to maintain. As much as you want to pay the debt off as fast as possible, create a payment plan that you’ll be able to follow consistently through to the final debt payment. Keep in mind that the illness or emergency that caused you to obtain this debt could keep you out of work for a period of time. In that case, it might also make sense to allocate a portion of what you would’ve paid extra on the debt to savings so you’ll have a cushion if you do find yourself out of work later. Keep chipping away at that debt and your score will improve over time. Or you could ask your medical debt collector to settle, if you do have a large cash amount in hand.
Never miss a bill. Whether you’re paying the minimum or extra on your debt, make sure you never miss a bill. As mentioned in the point above, you may find difficulty meeting the minimum requirements if you’re ever out of work, but missing a bill or paying a bill late has an immediate impact and can make it even harder to recover your score. If you’re ever struggling to make your minimum payments, set up a payment plan so you can achieve something more manageable.
Keep all other debt down. One way to prevent further damage to your score is to keep all other debt down if possible. Avoid credit cards and stay on track with your student loans (or apply for a deferment or forbearance if you need to pause your payments). Keeping other debt down will give you a healthier score.
Ask your utilities providers to report your payments. To show your good payment behavior, ask your utilities providers and your landlord (if you’re renting) to report your payments to the credit bureaus. This will help you build your score back up simply by paying the bills you already had to pay.
Review your credit report several times a year. Since it’s not uncommon for medical billing mistakes to happen, review your credit report often and dispute any mistakes you find. Since there are three free reports per year (one per bureau), you can actually review your report every few months.
Research Reputable Credit Repair Companies. Credit repair companies might not have the best reputation, but don’t be skeptical. There are reputable credit repair companies that don’t charge a fee unless their scope of work is completed. Many people just don’t have the time to do this all by themselves which is why credit repair companies might be a viable option.
The name of the game when it comes to credit score repair is unfortunately as much about mitigation as it is about proactivity. Many of the steps to follow involve what not to do, with the most important what to do being to make payments on time, every time. Nothing will damage a credit score faster than a missed or late payment. But if you can follow these steps, you can ensure that this fair (and thus unfair) reporting on medical debt won’t set you back financially.
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