Some 43 million Americans might see their credit report improve soon, thanks to new policies put into effect by the “Big Three” credit reporting agencies — Equifax, Experian, and TransUnion.
As of Sept. 15, credit reports will no longer include medical debts that are less than six months past due.
This is a big deal. At least one unpaid medical collection appears on one in every five credit reports, and these medical debts negatively affect the credit scores of as many as 43 million Americans, according to a 2014 study of collection data by the Consumer Financial Protection Bureau (CFPB).
This is the second major change to credit reporting this year that could help boost millions of Americans’ credit scores. As of July 1, the major credit reporting agencies agreed to remove from consumer credit reports any tax lien and civil judgment data that doesn’t include all of a consumer’s information.
This new medical debt reporting change, however, will have a far greater impact. Research has shown that many consumers’ medical debts aren’t all that representative of their creditworthiness, which helped drive the bureaus to make the change. In fact, around 50 percent of Americans with medical collections on their credit report had no other significant blemishes on their credit report, according to the CFPB.
And even though the cost to your credit can be dire, most Americans don’t actually even owe that much for their medical expenses — the average unpaid medical collection tradeline is only $579, according to the CFPB’s 2014 study. This means many consumers are taking major credit hits for a relatively low bill.
Additionally, the agencies have promised that if your insurance company ultimately pays off a medical collection, this debt will be removed from your credit report altogether. Both of these changes will provide more time for insurance claims to process, says John Ulzheimer, a consumer credit expert based in Atlanta.
Expect to see an impact soon
The changes officially take effect on Sept. 15, and their influence will be felt fairly immediately. These new policies are both immediate and retroactive, meaning no medical debt from within the last six months should show up on your credit report after that time.
Jenifer Bosco, a Boston-based staff attorney with the National Consumer Law Center (NCLC) who specializes in medical debt, recommends using these changes as an opportunity to check your report now. That way, you can see if there are any collections that need to be altered because of the new debt practices.
Bosco suggests viewing your credit report for free by filling out an online request with Annualcreditreport.com. You can check out MagnifyMoney.com’s online guide for a bank-by-bank breakdown of how to easily receive your FICO Score.
The immediacy of this agreement is important, because medical collections can be a long and arduous process. Bosco says the new 180-day window is especially helpful because it provides a cushion for consumers who are trying to work through expenses with their insurance provider.
“It’s definitely helpful for people who might actually just have a debt and owe the money, but also people who are going through a lengthy process with their insurance company to get something covered under their policy,” Bosco says.
How much will credit scores improve?
While it’s difficult to measure exactly how much unpaid medical bills can affect your credit, Ulzheimer says these debts are typically just as detrimental as other collection types. “For example, the impact can range from severe, if you don’t have other unpaid bills on your credit report, to nominal, if medical bills are just one of many outstanding collections,” he told MagnifyMoney.
Having good credit often makes the cost even higher. According to the CFPB’s collection data research, an unpaid medical bill of $100 or more can drop a credit score of 680 by more than 40 points, but the same bill could drop a score of 780 by more than 100 points.
Consumers who notice incorrect medical debt after Sept. 15 should send a dispute to the credit agency that falsely reported it, the NCLC recommends in a press release. If this doesn’t work, you can reach out to the CFPB. If your state’s attorney general was one of the offices involved in the agreement, you can direct your issue to them.
The CFPB research also found that the lack of price transparency and complex insurance coverage systems make medical bills often a source of confusion for consumers. People can often incur debts simply because they aren’t sure exactly what they owe or who they need to pay. Having more time to figure out what you owe, pay your debts, and work through collections with your insurance company can be a major financial benefit, Bosco says.
Bosco also says the changes go beyond specific circumstances and that these protections will be helpful regardless of your situation.
“It benefits all consumers who have medical debt,” she says.
Better credit for all?
The changes are the result of two separate settlements — one with the Attorney General of the State of New York and one with the attorneys general in 31 other U.S. states — but Ulzheimer says the changes are universal.
This means that regardless of what state you live in, credit agencies can’t fault you for medical debts that are less than 180 days old, or for collections that are ultimately handled by your medical insurance.
Hopefully, these changes mean there will be less medical debt bogging down Americans’ credit overall.
The agreement was reached voluntarily, which means there is no sweeping federal or state law or regulation guiding these changes but shows the credit agencies are on board.
“We have never hesitated to go beyond the letter of the law to voluntarily improve the existing credit reporting environment,” Stuart Pratt, the president and CEO of the Consumer Data Industry Association (CDIA) said in a press release announcing the changes. The CDIA represents the country’s consumer data industry, which includes the three major national credit agencies.
Still, this decision is incredibly important considering how instrumental the “Big Three” are in determining credit scores.
The federal government considers Equifax, Experian and TransUnion to be the country’s major credit agencies, and you’re entitled to a free report from all three companies each year. The information that shows up on reports from the “Big Three” carry major weight, so having a chance to improve your score with these groups can go a long way.
To aid this process, the NCLC has created guidelines — called the Model Medical Debt Protection Act — to help protect consumers from unfair medical collection procedures. The guidelines can be used as a standard for improving their medical debt practices even further.