Should Medical Debt Hurt Your Credit?

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Of all the annoying things about your credit score, the one that turns people’s crank the most is how medical debt can tarnish it. That’s understandable. Nobody plans to get sick, healthcare costs are skyrocketing and a lot of people still don’t have health insurance. Even if you do have insurance, confusing requirements about preauthorization and paperwork can make it onerous to get bills covered before the provider sends them to collections. Anecdotally, doctors’ offices and medical facilities or service providers are said to be quicker than other kinds of creditors to send a bill to collections — sometimes even if the patient’s obligation to pay is in question. As a result, you could be stuck with a black mark on your credit for no other reason than bad luck.

But Congress wants to change your luck. Under the Medical Debt Relief Act, a bill backed by representatives from both parties, the three major credit reporting agencies would be required to erase paid or settled medical debts of less than $2,500 within 45 days. Currently, even a small bill will linger on your credit report for seven years, which can make it more expensive or even impossible to get a mortgage, refinance your home, open a credit card or take out a car loan. And as Beth Givens, director of the Privacy Rights Clearinghouse, pointed out in a recent interview, the inclusion of medical debt on a credit report also has the potential to harm people looking for a job. With unemployment still high, a company might opt not to hire a person whose credit report indicates a possible health problem.

(MORE: Why There Are Disparities in Healthcare Costs Within the U.S.)

But the lending industry is not a fan of this idea. Similar bills have been floated in Congress before and have been derailed by opposition from creditors and their trade groups. Fair Isaac, the company behind FICO scores, warned against “subjective tinkering” with scores in a recent blog post. Those who oppose the bill argue that without a one-size-fits-all model for gauging credit risk, lenders can’t compare apples to apples in order to figure out who’s a better prospect for a loan.

They’ve got a point. Tons of ink and pixels have been devoted to bemoaning the impact of “no-doc” mortgages on the real estate meltdown. In general, we’d agree that more empirical data is better, but medical costs are an anomaly. The U.S. doesn’t have the kind of broad healthcare coverage like most other developed nations, which means the cost of being sick often falls on the patient’s shoulders. Should they really be penalized for this?

A recent study by credit bureau TransUnion looked at 129,000 mortgages in default and determined that if this was a one-time aberration in an otherwise good credit history, it didn’t impact the person’s otherwise timely bill-paying habits. Maybe this is going out on a limb, but wouldn’t a similar logic apply if an otherwise fiscally diligent person was slammed with medical bills?