In this episode, we welcome back Ted Rossman, Senior Industry Analyst at Bankrate to talk with us about what it means for consumers and their credit scores after the credit bureaus removed paid medical collections from all credit reports.
Highlights of this episode include:
- Why the credit bureaus decided to remove paid medical bill collections
- The net impact to consumer credit scores
- Advice for dealing with medical debt
- Bankrate resources
Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. The major credit bureaus recently decided to remove paid medical collections from all credit reports, which is big news for the 43 million Americans who have $88 billion worth of medical debt on their credit reports, according to the Consumer Financial Protection Bureau. To talk with us about what this means for consumers and their credit scores, I’m joined by Ted Rossman, Senior Industry Analyst at Bankrate. Ted, welcome back to the show.
Ted Rossman: Hey, Mike. Thanks for having me.
Mike: So Ted, why did the credit bureaus decide to remove paid medical bill collections from credit reports at this point?
Ted: This is something that the Consumer Financial Protection Bureau has been poking around. They’ve taken a much more active stance during the Biden administration, recently leading to some changes with overdraft fees, now medical debt. Next might be the buy now, pay later industry. They really had a few complaints about medical debt. One is that it’s kind of apples to oranges with respect to other debts. Medical debt is often a large, isolated, one-time expense, sometimes even a life-or-death kind of thing. The CFPB argued that it’s maybe not the best predictor of your credit risk, which is ultimately what the credit score is all about. Paying your credit card or mortgage or car loan every month is pretty different from paying off an isolated medical expense. Also, there’s the whole insurance issue, that maybe this wasn’t even your responsibility; maybe it was just an insurance mix-up. Because of all these concerns, they’ve been pushing for different treatment of medical debt, and now they’re getting it.
Mike: It actually sounds pretty fair when you think about it, so I’m glad to see that, from my own personal point of view. Ted, what is the net impact to consumer credit scores due to this change?
Ted: I think it could be really significant. These are positive developments for people, the fact that paid medical collections will soon come off credit reports, the fact that amounts below $500 will soon come off, and the fact that these collections need to be in collections for at least a year, even if unpaid, to hurt people. I think it helps on a few different fronts. It gives people more time to sort things out with insurance or maybe come up with a payment plan. It also eliminates the seven-year negative impact of a paid collection, [that?] even if somebody feels like they did the right thing, they paid it off– I mean, yeah, I guess you could say maybe it shouldn’t have gone to collections in the first place, but it could have been an honest mistake with insurance, and that was lingering for a lot of people. If medical debt is the only blemish on your credit report, it could be costing you 100 points or more. That’s huge. Off an otherwise strong score, I mean, that right there could drop you into the fair or good category. That could lead to denials on loans. It could cost you more money in interest. So I think a lot of people will add a lot of points to their credit scores, and that just makes them much more credit-worthy borrowers.
Mike: And you just touched on another angle to this a second ago, because in addition to removing paid medical bills, new unpaid medical collections won’t be reported for at least a year. So can you add some detail around that and why that change is here?
Ted: I think a lot of that speaks to the tangled web of insurance policies, and just the fact that sometimes it takes a while and sometimes there is some back and forth. And something that CFPB Director Rohit Chopra has talked about a lot is that– are we attributing this debt to the right source? We mentioned that in one respect, medical debt is different because you haven’t necessarily signed on the dotted line for a loan. I mean, this may have been an emergency care kind of situation. It’s different from taking out a loan to buy a car or buy a house. And I think– especially when it comes down to these big bills that go to insurance and there’s this kind of wrangling about who’s going to pay what, I think giving people more time is definitely appreciated. And that’s the idea here, is that we don’t just skip right to dinging people’s credit. Medical debt’s different, too, because it doesn’t usually appear on a credit report at all until it goes to collections. And that’s different from something like a credit card or [a?] car loan or a mortgage, where every month it gets reported positive or negative. So I think this kind of all-or-nothing, you’re either good or you’re getting hounded by collections– they’re trying to give people more time to sort that out.
Mike: That makes sense. Ted, do you have any advice for people that are dealing with medical debt, and particularly given these new provisions?
Ted: You still have to pay this money back, of course. These changes do change how it’s treated by the credit bureaus, but it doesn’t make the debt go away. So it is important, maybe even more important than ever now that paid collections are coming off. I mean, there’s a clear incentive for people to pay it off. That’s something that some people have asked me, and there’s been a little bit of confusion about, “Oh, does this mean that people don’t have to pay?” No, you definitely still have to pay. So the advice is, come up with a payment plan. Ask the doctor or hospital for a plan, maybe low or no interest for a while. A lot of those are available. Or maybe they’ll even forgive some of the debt as part of a charity care program. I mean, it doesn’t hurt to ask for sure. If all of that fails, then maybe take out something like a personal loan as a form of debt consolidation. You could potentially get an interest rate in the mid-single digits if you have good credit. I would not put this on a credit card because the average credit card rate is over 16%. And also, then you’re turning medical debt into credit card debt, and that’s viewed less favorably by the credit bureaus. So I would not do the credit card. If you’re really struggling, maybe reach out to a nonprofit credit counselor like Money Management International. They too have payment plans. They’re more widely available than something like a personal loan. You don’t necessarily need great credit. So the main rule of thumb here is, you need to pay it back. You’ve got to come up with a plan. Try to get the lowest interest rate possible.
Mike: Sound advice, Ted. If someone wanted to get more resources from Bankrate, where can they go?
Ted: We have more at bankrate.com about medical debt and also many other aspects of personal finance. Investing, saving for retirement, buying a house, all that good stuff.
Mike: Fantastic. Ted Rossman, thanks again for joining us today on the Hospital Finance Podcast.
Ted: No problem. Thank you.
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