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Your medical debt fell off your credit report – What now?

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Today is a big day in the credit scoring world. Medical debts that have been paid after being sent to collections are coming off credit reports, as are medical collections less than a year old.

Medical collections under $500 will also disappear from credit reports early next year, at which point about 70 percent of medical debt in collections will have been eliminated from Americans’ credit reports, according to the Wall Street Journal. In total, the Consumer Financial Protection Bureau says that 43 million Americans have about $88 billion in medical debt on their credit reports.

This is a really big deal. Traditionally, these debts can weigh your credit score down for seven years. And if a medical collection is the only negative mark on your credit reports, it could trim 100 points or more off your credit scores. Once it is removed, your score could improve by leaps and bounds. If you have other blemishes, however, the removal of a medical collection probably won’t be as significant.

It’s always a smart idea to check your credit reports regularly. A great resource is AnnualCreditReport.com. It’s a government-backed website that is providing Americans with free weekly access to their Experian, Equifax and TransUnion credit reports through the end of 2022.

Especially if you’ve had medical debt on your credit reports previously, I suggest checking again now. Medical collections you’ve paid off and medical collections less than a year old should have come off automatically as of July 1, so if they’re still on there, I suggest filing a dispute with each bureau that is displaying the incorrect information.

If you’re interested in viewing your credit score, not just the underlying reports, organizations such as Experian and Discover offer free access to all Americans.

How to continue to build your credit

If you saw your credit score spike, you might be motivated to keep the momentum going. And if your score still needs some work, it’s all the more important. The lower your credit score, the more likely you are to be declined for loans and lines of credit. Even if you’re approved, you’ll likely pay substantially higher interest rates.

Many of the best tactics for improving your credit score represent more of a marathon than a sprint. Seek to pay all of your bills on time, keep your debts low and show that you can successfully manage various types of credit over the long haul. Still, there are some things you can do quickly.

My favorite is to lower your credit utilization ratio if you can. This refers to credit you’re using divided by credit available to you, especially on revolving accounts such as credit cards. There isn’t a magic number, but a single-digit percentage is best (charging less than $1,000 each month on a card with a $10,000 limit, for example).

Most people don’t realize that it’s typically reported as of your statement date, so even if you pay in full (a great practice for avoiding interest), you might still have a high utilization ratio. Potential fixes include making extra payments throughout the month, thereby knocking the balance down before the statement even comes out, or requesting a higher credit limit.

Another good tactic is to sign up for an alternative credit scoring system such as Experian Boost. This can improve your credit score by rewarding on-time utility, telecom and streaming payments that haven’t traditionally been factored into credit scoring.

You could also consider asking a parent or another trusted individual to add you to one of their credit card accounts as an authorized user. As long as they’re using the card responsibly, this positive behavior can help your credit score as well.

Note that your medical debt might come and go

I recently received an email from a reader which helps illustrate some interesting nuances pertaining to how the credit bureaus treat medical debt. This reader, Mona, told me that she has a $356 dental bill in collections. She was not satisfied with the dentist’s work and does not want to pay the bill. Her credit score has dropped from 803 to 681. That’s a big hit from exceptional to just barely over the line of “good” credit.

Mona was excited to learn that medical collections under $500 will be removed from credit reports in early 2023. She was even more excited to learn that collections less than a year old will be removed before then. The clock starts ticking on the date of first delinquency, which in her case was in Oct. 2021. This collection should come off her credit reports starting today, July 1, because it’s less than a year old.

However, in a few months, it can come back on the reports once it hits the year mark. Then it should come off permanently in early 2023 once amounts below $500 are removed. While Mona is excited that her credit score should soon increase, I reminded her that the credit bureaus’ new ways of viewing medical debt do not make the debt go away. She can still be hounded by collections agencies and potentially sued (although I don’t think that’s particularly likely in her case since she owes a relatively small amount).

The bigger issue is that, while $356 isn’t chump change, it’s nothing compared to how much a reduced credit score can cost someone over the long haul. If Mona were in the market for a mortgage, for instance, with a credit score of 681 versus 803, the difference would be astronomical. The median credit score for a newly originated mortgage in the first quarter of 2022 was a whopping 776, according to the New York Fed, so someone with a 681 credit score might not even be approved.

If we assume this borrower with a 681 credit score could get approved for a 30-year fixed-rate mortgage, a good rate these days would probably be around 5.5 percent. That compares with about 5 percent for someone with a credit score in the mid-700s or higher. On a $300,000 loan, the more creditworthy borrower would pay $1,610 per month in principal and interest. At 5.5 percent, that rises to $1,703 per month. Over 30 years, that’s a difference of $33,480!

Mona tells me she’s not in the market for a loan anytime soon and prefers to ride it out, but for a lot of people, paying a $356 medical collection would be well worth it for the credit score benefits and to get the debt collectors off your back.

How to avoid future medical debt

Unlike most other debts, medical debt isn’t usually a conscious choice. It’s often the result of an unexpected, possibly even life-threatening, condition. There’s only so much you can do to protect yourself. Making sure you have adequate insurance coverage is a good starting point, but even then, sometimes you’re left on the hook for significant charges.

One thing you can do is conduct some research before scheduling a procedure. Seek in-network doctors whenever possible and compare the out-of-pocket costs charged by different practitioners. The costs can vary widely; MRIs, for example, can range from $400 to $3,500.

Also, consider asking the doctor or hospital for a payment plan. Many offer patients low- or no-interest financing for several years. Sometimes they even forgive some or all of the charges via charity care programs. The worst they can do is say no. It’s best to start with this approach before considering alternatives.

If you have a strong credit score, you might be able to qualify for a personal loan rate as low as about 6 percent. Some credit cards offer 0 percent introductory APR periods lasting as long as 21 months, but tread carefully. The regular interest rate kicks in after the 0 percent term ends, and the average credit card APR is nearly 17 percent. A debt management plan offered by a reputable nonprofit credit counseling agency such as Money Management International is often a better option.

The bottom line

Recent changes to how the credit bureaus treat medical debt should lift tens of millions of Americans’ credit scores. Keep close tabs on your credit scores and practice solid credit fundamentals to care for your credit score, which is one of the most important numbers in your financial life.

Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.