Can Medical Debt Affect Your Credit?
The cost of receiving medical care is a big problem in the United States. Not only are one-third of GoFundMe campaigns related to covering medical bills, according to a 2018 interview with the organization’s CEO, but various sources in recent years have also tagged medical debt as a leading cause of bankruptcy.
Even for folks who don’t end up going bankrupt over their medical bills, there are still several ways that these debts can negatively affect their life. Excessive medical debt can deplete savings and tank your credit score.
The relationship between medical debt and credit isn’t exactly a straight line. But while medical debt doesn’t necessarily affect a person’s credit score, there is one fairly direct path that can be followed from high medical costs to bad credit.
First things first: debt affects your credit score
When you take out a personal loan or put a balance on your credit card, the amount that you borrow ends up on your credit reports. These are documents that track your history as a borrower and user of credit, typically over a seven-year period (although some information, like bankruptcies, can stay on your report for longer). Credit reports are maintained by the three major credit bureaus: Experian, TransUnion, and Equifax.
Your credit score is based on the information contained in those reports. The most common type of credit score is your FICO score, which is based on a scale from 300 to 850. The higher your score, the better your credit.
When it comes to debt, your credit reports not only track the number of accounts you have open, but they also tally the amount of money you owe on each account. Payment history is the most important part of your credit score—it makes up 35% of your overall score—but your total debt is a close second, comprising an additional 30%.
Owing too much debt will have a negative impact on your credit score. This is especially true if you owe a large amount of high-interest consumer debt through credit cards and personal loans. Ten-thousand dollars in credit card debt will likely have a much larger negative impact on your score than $100,000 in mortgage debt.
Medical debt can fall into a gray area and doesn’t necessarily go on your credit reports — but it can.
The ambiguity of medical debt
“An unpaid medical debt will likely not show up on your credit report,” said Mike Pearson, founder the personal finance site Credit Takeoff. “This is because unlike, say, a credit card company, your doctor’s office or hospital probably doesn’t directly report payments to the three credit bureaus — which is how information shows up on your credit reports in the first place.”
However, just because your health care providers aren’t reporting your unpaid bills directly to the credit bureaus, they may still hire someone to take care of dealing with the outstanding balances for them. As a result, owing a large amount of medical debt can still easily tank your credit score. As Pearson put it: “You’re not in the clear yet.”
Debt collection accounts
Banks, credit card companies, and other types of personal lenders report information to the credit bureaus — and many landlords report to them, as well. Meanwhile, debt collectors also report to the credit bureaus, but they don’t report loans or credit cards; they report unpaid debts, also referred to as “collection accounts.”
If you stop paying your credit card, it will get sent to collections and eventually show up on your credit report as one of these collection accounts. The same is true of personal loans, installment loans, and other unsecured debts — including medical bills.
“If you continue to ignore the medical bill, what your medical provider will likely do is turn your account over to a collection agency,” Pearson said. “It’s at this point the bill may turn up on your credit report.”
In addition to that, unpaid medical debt won’t just affect your credit, it could drop your score from good to bad in one fell swoop. “Having an unpaid medical bill on your credit report can drop your credit score up towards 100 points,” Pearson said, “and can remain on your account for seven years.”
Tips for handling medical debt
The threat that unpaid medical debt poses to your credit score and your overall financial well-being isn’t just theoretical — it’s very real. Bankruptcy attorney Joy Alford-Brand says she’s seen hundreds of credit reports full of negative entries from debt collectors who were collecting on medical debt. Here’s how she recommends managing the fallout:
Maintain careful records. For those who are struggling under the weight of their medical bills, Alford-Brand says that your best weapon is organization. “Make sure you are keeping careful records about your debt. Medical debt can be incredibly confusing; don’t get caught in the trap of not knowing what you owe to who and why,” she said. “Check your bills for accuracy, too. Information is entered by humans and they can make mistakes. Small mistakes on medical bills can be costly.”
Know your rights. Alford-Brand makes clear that you should know your debt collection rights. “Debt collectors regularly, and blatantly, violate the Fair Debt Collections Practices Act. Make sure you are familiar with it and holding debt collectors to the letter of the law.”
Consider all options. While bankruptcy should never be your first option — especially when it comes to your credit score — Alford-Brand lays out how it can still help you discharge those debts once all other options have failed. “While it is not pleasant to consider declaring yourself insolvent, the promise of a fresh start can be worth it if you are suffering under a mountain of medical debt,” she says. “Medical debt is routinely discharged in bankruptcy, and while it stays on your credit for 10 years, the automatic stay and the discharge injunction can help you get back on your feet after a traumatic medical experience.”
Moving on past medical obligations
Maintaining a good credit score is an important part of your financial health — but when it comes to digging out from underneath a mountain of medical debt, maintaining good credit isn’t always possible. In cases like that, building up a well-stocked emergency fund can go a long way to providing you some financial stability, even if you have lousy credit.
Joy Alford-Brand became a licensed attorney in North Carolina in 1999. She has practiced bankruptcy law for 17 years. In 2015 she published a book on personal finance based on her experience as a bankruptcy attorney called Money Basics, Keeping It and Growing It. She also founded NewCashView.com to teach people basic personal finance techniques to help them avoid filing for bankruptcy and learn to be financially empowered. Follow her on Instagram @joyalfordbrand.
Mike Pearson is the founder of Credit Takeoff, a research-driven personal finance site for people looking to improve their credit. A proud member of the 800 Credit Club, Mike writes about practical steps that everyday consumers can take to increase their credit scores. His advice on credit repair and credit scores has appeared in QuickBooks, Go Banking Rates, and MortgageLoan.com.