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About 70% of medical debt to be erased from credit reports: Here's what that means for your credit score

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Key Points
  • Starting July 1, paid medical debt will no longer be included on consumer credit reports, according to a joint statement from Equifax, Experian, and TransUnion.
  • New unpaid medical debts will now only appear after a full year of being sent to collection, instead of the current six months.
  • "Many otherwise qualified borrowers have their credit scores dragged down by medical debts that they're not responsible for, or may not even know about," says Ted Rossman, senior analyst at CreditCards.com.

The major credit bureaus, Equifax, Experian, and TransUnion, just announced a major change to how medical debt is included in your credit history.

Soon 70% of medical debt will be removed from consumers' credit reports, according to a joint statement released March 18. Meaning outstanding medical bills may no longer weigh down your credit score, which is the key metric used to determine rates on credit cards, auto loans, mortgages, rental agreements, and other loans and lines of credit.

As of last week, Americans owed at least $195 billion of medical debt. That's despite the fact that more than 90% of the population is insured, according to the Kaiser Family Foundation.

It's a "consumer-friendly change," says Ted Rossman, senior analyst at CreditCards.com. "Many otherwise qualified borrowers have their credit scores dragged down by medical debts that they're not responsible for, or may not even know about."

Removing paid debt could help improve credit scores

Starting July 1, paid medical debt will no longer be included on consumer credit reports. The credit bureaus also announced that in the first half of 2023, medical debts of less than $500 will not be added to credit reports either.

New unpaid medical debts will only appear a full year after being sent to collections, instead of the current six months. "The fact that new unpaid medical collections won't be reported for at least a year is also a consumer-friendly change that will give patients more time to sort out these bills with their insurance company, which is often a time-consuming and frustrating process," Rossman says.

Under the current rules, if a medical debt went to collections and was unpaid, it could linger on someone's credit report for up to seven years. Starting this summer, "if someone has paid off their medical collections, this removal will help their credit scores, particularly on the older FICO models that are required for federally-backed mortgages, and still used for some other financial products, too," Rossman says.

'Medical care is essential and should not be penalized'

The decision comes after months of industry research, which showed roughly two-thirds of this type of medical debt is the result of either one-time or short-term medical expenses stemming from an "acute medical need," the statement said.

"After two years of the Covid-19 pandemic and a detailed review of the prevalence of medical collection debt on credit reports, the NCRAs [National Credit Reporting Agencies] are making changes to help people to focus on their personal wellbeing and recovery," the agencies said.

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It seems as though credit bureaus are finally distinguishing medical debt from other debts like credit cards, student loans, or mortgages, Rossman says. "With all of those, you're willingly taking out a loan. A medical bill, in particular, is a different situation. We might be talking about an expensive, life-or-death situation. There seems to be an acknowledgment that medical care is essential and should not be penalized by the credit bureaus."

This is a long time coming, says Allison Sesso, CEO of RIP Medical Debt, a charity that has eliminated more than $6.6 billion of medical debt for Americans. "Medical debt is destructive and upends lives every day. Most people in the U.S. are one accident or illness away from financial ruin."

If you are currently dealing with medical debt, Rossman suggests negotiating directly with the doctor or hospital. "They often offer payment plans which are much more affordable than the average credit card rate of 16.34%," he says.

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