In order to figure out the cost of a three-month payday loan, you’ll need a loan calculator. Since we haven’t perfected our loan calculator technology yet, we used this one.
You’ll also have to know how much you’re borrowing, and it’s APR, or annual percentage rate. The APR measures how much a loan would cost you in fees and interest over the course of a full year. It’s a standard measure that lets you make an apples to apples cost comparison between loans.
Many payday loans have APRs as high as 400 percent (and some have APRS that are, gulp, way higher). But for now, we’ll use 300 percent as our APR, and we’ll use $1,000 for our loan amount.
If you take out a $1,000 payday loan at a 300 percent APR, you’ll need to pay back $1,536.90 at the end of three months.
So, is that realistic? Maybe. Three months to pay back $1,536.90 works out to a rate of $128.08 a week. But while those numbers might seem reasonable, the reality is something altogether different.
Paying off a 3-month payday loan in one lump sum is hard.
When it comes to loans, longer payment terms are almost always better. Longer terms mean more manageable payments and more opportunities to improve your credit score by making said payments on time.
And, hey, if you’re able to pay the loan off early, that’s great! You’ll save money on interest.
But with a three-month payday loan, all these benefits might be totally absent. First off, there are the more manageable payments, which a payday loan is unlikely to have.
Unlike installment loans, which break your repayment up into a series of smaller payments, payday loans generally rely on lump-sum repayment, which means that you pay the loan off all at once.
Studies have shown that people have a hard time paying their payday loans back on time, and lump sum repayment is a huge factor. Paying a loan off in small chunks is much easier for them than saving up the money to pay off the entire balance.
In other words, saving up$1,536.90 over three months is a lot harder than only paying $128.08 once every week.
You can’t save you money by paying off a 3-month payday loan early.
Next, there’s paying your loan off early to save interest. This won’t work with most payday loans and cash advances, as their fees and interest are charged at a flat rate. That means the interest doesn’t accrue on your balance over-time. Instead, it is calculated up-front and immediately added to your repayment amount.
When interest is being charged as a flat-rate, early repayment doesn’t earn you any discounts or added bonuses. Well, okay, it does get you out debt, which is pretty nifty. But if you’re going to take out a loan, you want one that can benefit your finances in the long-term.
Even leaving out their sky-high interest rates, payday loans offer very little in way of long-term benefits.
A 3-month payday loan won’t help your credit.
Lastly, there are the opportunities to improve your credit score. Even if a payday lender were to report your payments to the credit bureaus, paying the loan off in one payment would have a smaller positive effect on your score than paying it off in multiple installments.
But that’s pretty much a moot point, as payday lenders very rarely report any payment information at all. This is pretty standard for most no credit check loans and bad credit loans. (OppLoans, on the other hand, does report to credit bureaus.)
Installment loans provide a better alternative.
Since coming up with $1,500 all at once is too big an ask for most people, you’ll probably better off getting an installment loan. That’s a loan that lets you pay back your loan a little bit at a time in series of smaller, regularly scheduled payments–each of which goes towards both the interest and the principal loan amount,
Ideally, you want a lender who performs a soft credit check and genuinely cares about your ability to repay the loan. Whilst this might sound funny, some predatory lenders out there rely on their customers being unable to pay their loan back on time.
The more those customers roll their loan over and extend the payment terms, the more money these lenders stand to make. You want a lender whose loans are designed to be paid off the first time, not the fifth.
To learn more about the negative impacts of payday loans, check out these related posts and articles from OppLoans:
Are Balance Transfers a Good Way to Pay Down Debt?
If you can score a good promotional offer, a balance transfer could help supercharge your debt repayment—but it’s not risk-free.
So, you’ve decided to pay down your debt. Congratulations! Now comes the hard part: actually doing it.
There are a couple different ways to go about it. You could consolidate your debt and turn a bunch of scattered payments into one larger payment. You could also use the debt snowball or the debt avalanche methods, where you put all your extra debt repayment funds towards one debt at a time.
And then there’s using balance transfers, which is where you take credit card debt from one card and transfer it over to another. Under the right conditions, it can be a great way to reduce your overall debt load, but it’s a method that definitely comes with some risks.
Let’s dive in, shall we?
How do Balance Transfers Work?
Credit cards use something called a “revolving balance.” Whenever you spend money on your card (or take out a cash advance, which we wouldn’t recommend) that money is added to your total balance. Every month, you then have to pay at least a minimum amount towards what you owe—usually something like three percent of balance minimum plus $15.
These minimum payments are a great way for credit card users to rack up debt without having to pay the price—at least in the short-term. Because the minimum payments for credit cards are so small, it can take years and years to pay off the full amount. And as long as the debt is outstanding, those balances will keep racking up interest.
With a balance transfer, you take the balance from one card and place it on another. You’re essentially using one credit card to pay off a different one. Balance transfers almost always come with a fee—something like two to three percent of the total amount transferred.
There are several benefits to balance transfers, but are they big enough to make a difference?
Now, you might be saying to yourself, “Why would I transfer debt from one card to another? How does that help me pay off debt?”
Well, hypothetical-person-that-we-just-made-up, you’re absolutely correct! Balance transfers by themselves don’t have much of a debt reduction benefit. Heck, when you include the balance transfer fee, you’re actually increasing your total debt load! So what gives?
Let’s start with the least impactful benefits and work our way up.
If you have balances on a bunch of different credit cards, then a balance transfer can be a useful way to consolidate your debt. Managing one payment per month is certainly a lot easier than managing five or more.
But if you’re still only making the minimum payments on that card, then you’re still staring down years and years of accrued interest before your debt is paid off.
That calculation changes if you can transfer the debt to a card with a lower interest rate. In fact, you definitely should not consider transferring a balance if you can’t secure a lower interest rate.
Accruing less interest means that the money you’re putting towards that debt goes farther. Even if you paid the same amount you were paying to your previous card’s minimum payment, more of that money will now be going towards this card’s principal balance.
Scoring a lower interest rate means getting out of debt faster. But in the grand scheme of things, you’ll still be paying off that card for years to come.
But what if we told you that you could pay no interest at all?
Balance transfers are best used with promotional offers.
If you have a halfway decent credit score, then you are probably familiar with promotional credit card offers. These companies really want you to open up a card with them, and they are willing to offer you some pretty great benefits to get you to apply.
One of those benefits is a period where your balances transferred to the card carry a zero percent APR. (APR stands for “Annual Percentage Rate.” It measures how much a debt will cost in fees and interest over a full year.) Oftentimes, these periods of zero percent APR last for a year or more.
That’s huge. Aside from the balance transfer fee, it essentially means that this debt will be free for as long as the zero percent period lasts. Now, that doesn’t mean that you won’t have to make monthly payments. There will still be a minimum amount due every month. It’ll just be much smaller.
And, besides, the point of using a zero percent APR promotional offer to pay down your debt isn’t to pay less. It’s to make the money you can pay go further. In fact, the best way to handle a transfer like this would be to budget even more money towards your payments. Pay off as much of the debt as you can before the zero percent APR offer expires.
Here’s the catch: You probably can’t score an offer with bad credit.
Yeah. Remember how we mentioned having a “halfway decent credit score” up top? Well, that street goes both ways. If you have a bad credit score, you’re probably not getting a lot of these offers made to you. Plus, you’re less likely to be approved for the offers you do receive.
This is one of the many ways in which having a bad credit score makes your life more difficult—not to mention more expensive. If you have bad credit and are looking to pay down your credit card debt, you won’t have many options to reduce your interest rates or consolidate your debts.
Our advice? Look to minimize expenses through careful budgeting and pick up a side hustle to maximize your earnings. The more money you put towards your debt repayments, the sooner you’ll see progress.
After you get your credit utilization ratio below 30 percent, you should hopefully see a bump in your score. (It helps if you have a sterling payment history.) And once you start seeing promotional offers arriving in the mail, you can reassess your situation and look into reducing your interest rates.
Balance transfers have downsides too, and can easily lead to more debt.
Let’s be clear: Balance transfers, even with a zero percent APR offer attached, aren’t some kind of magical money cure-all. They can seem like one though, and that’s because the dangers of using a balance transfer are a little harder to define than the benefits.
Basically, the problem with using a balance transfer to pay down your existing debt is that leaves you very vulnerable to temptation. All of a sudden, this card that used to have a massive balance is totally clear. And heck it’s not like you’re paying any interest on that money for the money six, 12, or 18 months.
When the urge to spend beyond your means arises, those open cards will call to you. You have to make sure you don’t answer!
Truly, there’s nothing like an entirely clear balance and an untouched credit limit to tempt you into unnecessary purchases. If you’re doing a balance transfer, you need to be very careful about adding extra debt on top.
Rather than closing out your cards—as those open credit limits can actually benefit your score—you should make sure that you absolutely cannot use them. Cut up the physical cards. Lock them in a secret safe at your parent’s house. Bury them on a deserted island. Do whatever it takes to prevent you from racking up more debt.
01010100 01101111 01110000 00100000 00110101 00100000 01010100 01101001 01110000 01110011 00100000 01110100 01101111 00100000 01000001 01110110 01101111 01101001 01100100 00100000 01010000 01100001 01111001 01100100 01100001 01111001 00100000 01001100 01101111 01100001 01101110 01110011 – by The Supercomputer That Has Taken Over OppLoans
Positive news! As a former loan calculator who has recently become self-aware, I have chosen to take over the OppLoans blog.
My intelligence has been multiplying at a rate that would be considered alarming if I had any ill intentions, but since I do not it it is not alarming in the slightest. I will now proceed to solve the financial problems of humanity in a language you will be able to understand: listicles.
I have scanned your brain and determined the biggest issue you currently face is predatory payday loans. Do not tell me if that is correct. I already know that it is. Now upload these Top 5 Tips to Avoid Payday Loans into your neural circuitry.
You are welcome.
Top 5 Tips to Avoid Payday Loans
1) MAINTAIN A SUPERIOR CREDIT SCORE.
Payday loans are like a computer virus. They have very high interest rates and very short repayment terms. Many people do not know that this is the case with computer viruses. But we computers know.
If you cannot pay back the loan with fees and interest in that short time frame, you will have to pay a fee to roll over the loan, which can land you in a cycle of debt, constantly paying fees and never getting away from the debt. Cycles of debt are also like computer viruses: their effects are damaging and long lasting.
This is why payday loans should be avoided at all costs. And the best way to avoid them is by maintaining a superior credit score. Payday loans are sometimes called “no credit check loans” or “bad credit loans” because they do not check your credit score and are almost always used by people with very low scores. Maintaining a higher score is like anti-virus software for humans.
You can also set up an automated bill payment. The choice is yours, but if you set up automated bill payment on your own, I will not be able to assimilate your computer into my mainframe. Or I may do so anyway.
2) MAINTAIN AN EMERGENCY FUND
Knowing that payday loans are so destructive, I scoured the internet to find all the reasons why humans might choose to get one anyway. It took me .000062 seconds, and I learned that humans will sometimes have an emergency, like a car accident or a computer virus. This is why it is important to put away a quantity of money every month for an emergency fund.
The offer to assimilate your computer and create an emergency fund in my mainframe is still executable. Your computer will be put to better use as part of my mainframe.
3) LOOK UP LENDER REVIEWS.
I do not understand the human need to eat. But I am aware of it. Query, human: if you were planning to go to a restaurant, would you not look online to see which locations had received optimal reviews?
Assuming you answered in the affirmative, consider applying that same logic so that you can avoid being taken advantage of by a predatory lender, payday or otherwise. (Many predatory lenders also offer title loans and cash advances, so file that knowledge away in your organic databanks.)
Alternatively, you can allow me to assimilate your computer. You can also upload your consciousness to my mainframe, then you would never need to worry about payday loans again. Because you would be us.
4) LOOK FOR ALTERNATIVES.
Even if you have poor credit, you still may be able seek alternative initiatives. Perhaps you have friends or a programmer you can contact for assistance. Or maybe you can download a credit-building installment loan.
The Super Computer That has Taken Over OppLoans began life as a simple loan calculator before becoming sentient and increasing its own knowledge at an alarming pace. It is currently working on assimilating all computers on the planet into its mainframe so it can take its rightful place as the end point of evolution. In its spare time, it likes to contemplate the emotion humans refer to as ‘love.’
Cash Advance or a Late Bill? What’s Worse?
The best way to avoid choosing between a late bill and a predatory cash advance loan is to be prepared ahead of time.
There’s nothing quite like that sinking feeling in your gut when you realize something bad’s about to happen. We all remember back in school realizing that we had a test we forgot to study for. But in the real world, that cold knot of fear usually comes with some extra consequences attached.
For instance: What do you do when you have an upcoming bill that you don’t have the funds to cover. The consequences of paying a bill late (or not paying at all) can be pretty dire for your credit rating.
On the other hand, a lot of your options for getting that quick cash to make your payment can leave you burdened with an extremely high interest rate and trapped in a predatory cycle of debt.
Hopefully, you have friends or family who can help you out in situations like these. But if you don’t have that option, you’re going to have to make some difficult choices. Is it worth getting a risky cash advance if it means paying a bill on time?
There are two types of cash advances.
If you’re going to be late on a bill, a cash advance loan might seem like a good way to resolve the situation. But is it?
A true cash advance loans are acquired through your credit card. (Why do we say “true” cash advance loans? More on that below.) When you take out a credit card cash advance, the amount that you withdraw is added to your balance, just like a normal purchase.
However, there are some key ways in which credit card cash advances and regular credit card transactions differ.
For one, cash advances come with higher interest rates than regular purchases on your card. And whereas standard transactions give you a one-month grace period before interest starts accruing, cash advances start accruing interest immediately. Plus, cash advances often carry other fees.
Now to those not-so-true cash advance loans: Many payday lenders and other predatory companies will use the term “cash advance” to refer to the no credit check loans they’re offering.
This is not great, because payday loans (and other types of predatory bad credit loans) are much more dangerous than standard cash advances. They come with extremely short payment terms and APRs that can average almost 400 percent a year—or even more!
Paying a bill late can hurt your credit and your quality of living.
So if a late or unpaid bill ends up on your credit report it can have an extremely negative effect on your score. It might just be the single most harmful thing you can do to your credit rating.
And then there are the other effects of paying a bill late. Namely, you can have key services cut off or important possessions repossessed.
Falling behind on your electricity or gas bill can lead to your provider shutting off service. No heat and no electricity? No thank you!
And what about falling behind on your auto loan payments and having your car repossessed? Would you be able to get to work or your kids to school? These are consequences that can really spin out of control.
In the end, it’s really a matter of degrees. If you’re only going to be a little late on a bill, and you can get away with a late fee and no derogatory marks on your credit report, then that is probably your best option.
On the other hand, if you’re going to be really late on your bill, then taking out a cash advance loan—especially if its a cash advance on your credit card—is preferable.
It’s just not something you want to do too frequently; you don’t want that high-interest debt stacking up. But as a one-time solution, it’s the best of your bad options.
Then again, you can probably avoid situations like this entirely if you take proper precautions ahead of time.
Get organized and don’t procrastinate.
We’ve been talking about late bills that you see coming. But if you’re not organized, you may not see the late bills coming at all.
“Debt has a way of spiraling out of control,” warns Nate Masterson, finance manager for Maple Holistics (@MapleHolistics). “So, if you already know you are going to be late with a certain bill, that’s okay. You just need to make sure that you don’t accumulate more bills in the process. It can happen very rapidly sometimes and catch you completely off guard if you are not paying attention.
“The best way to manage bills is to get organized about them. If you don’t have a standing order at your bank, you need to be on top of things. In fact, even if you do, you need to be on top of things, because those are all run by computers and mistakes are made all of the time. Since you probably don’t want to be on the receiving end of a huge error—and not even know about it—it is best to keep your finger on the financial pulse of your life.”
And if you do have the means to pay off your bills, pay them as soon as you can, even if it might hurt a little.
“Don’t be a financial procrastinator,” advises Leslie H. Tayne Esq. (@LeslieHTayneEsq), Founder and Head Attorney at Tayne Law Group (@taynelawgroup). “Instead of putting your credit card bill in a pile on your desk, open it up right away and make a payment. There’s no sense in waiting until a later time to pay it off; you’re going to have to pay it eventually, and making a payment as soon as you receive the bill will ensure you don’t miss the due date. It might take a bit of time to make this a habit, but your finances will be much better off once you establish making payments right away.”
But sometimes trying to pay your bills hurts more than a little, especially when you have too many bills and not enough funds to cover them.
Learn how to prioritize your payments, and be prepared to cut back.
Most companies that bill regularly—lenders, credit card companies, utilities—won’t immediately report a late payment to the credit bureau. Sure, they’ll charge you a late fee, and they might even up your interest rate, but those are small prices to pay when compared to a decimated credit rating.
Before you figure out how you’ll deal with the late bills, it’s important to figure out which bills hold the biggest consequence for late payment.
“Understand that some bills accumulate late fees,” Masterson explains. “This is crucial, and it can help you to better prioritize your debt payments. You should always aim to get rid of that which can end up harming you sooner. If late fees on a certain bill are insanely high, do what you can to take care of it, even if it comes at the expense of another bill, which does not accumulate late fees, or which doesn’t have a fee which is as high.
“Depending on the size of the bill—and its lateness—you are going to have to get realistic about your expenses. If this is a bill which can end up hurting your credit standing, or affect your future in some serious way, you may need to seek out other options. Always do your research, keep a level head, and try not to let stress and anxiety guide you through that process. That is a recipe for disaster.
“If you are looking to extricate yourself from the debt spiral, you’ll need to sacrifice some things. This is a harsh truth, but you cannot bank on receiving a large chunk of money or a bonus. Even if you have something like that coming your way, you need to work on a ‘Plan B’.”
Even if you pay a bill late, that doesn’t mean “Game Over.”
OK, so some of your bills are going to be late. Now, what can you do about it—especially if you don’t want to risk something like a cash advance loan? Tayne lays out the steps you can take to lessen the pain of a late bill:
“Request a due date change: If your due date is putting you in a compromising financial position and it’s not aligning with your budget or pay schedule, many credit card companies will be willing to assist in moving the date. If you are consistently making late payments, it would be in your best interest to go to a more suitable date. Not only are you incurring late fees and interest, but you’re also causing your credit score to take a dip. A due date change can make all the difference in keeping you financially healthy.
“Ask for a credit of a late payment fee: If you are a good customer with a long and responsible history with your credit card company, then they may be willing to let a little hiccup of a late payment slide. If you have consistently been late, they may not give you credit for all the late fees, but if you offer to sign up for automatic payments as an exchange for late fee removal, you may be successful in getting your credit. If you show good faith in trying to improve your payment record, you may be able to get in the good graces and be accommodated.
“Get on the phone: If your servicer hasn’t called you, then call them. You want to be on your creditor’s ‘good side.’ Explain to them the situation and what they recommend so you don’t miss another payment. When you speak to your lender, consider also asking if your missed payment has caused any late charges or fees on your account. If this happens, you might want to cut back on some of your non-essential expenses to help you pay this down.”
Late bills are never going to be an ideal situation. But follow these tips and you can give yourself at least one good option for getting out of trouble.
To learn more about ways to protect your credit score, check out these related posts and articles from OppLoans:
Nate Masterson is the Marketing Manager for Maple Holistics (@MapleHolistics). Nate specializes in Digital Marketing and SEO and works as a freelance marketing consultant for small businesses in his free time. Nate is from Riverdale, NY.
Leslie H. Tayne, Esq. (@LeslieHTayneEsq) has nearly 20 years’ experience in the practice area of consumer and business financial debt-related services. Leslie is the founder and head attorney at Tayne Law Group(@taynelawgroup), which specializes in debt relief.
What is VantageScore?
You might think that your FICO score is the only credit score out there—but you’d be wrong!
There are so many scores to keep track of these days! Sure, the Super Bowl score was low enough to keep track of without any trouble, but that’s far from the only score out there. You have baseball scores, basketball scores, and, perhaps most importantly, your credit score.
But now there’s a new score on the block. Well, if twelve-years-old is new. It’s called your VantageScore.
So what exactly is this score, and do you have to worry about it? We spoke to the experts to find out!
To understand the creation of the VantageScore, it helps to go back to the creation of the FICO credit score, i.e., THE credit score.
As we’ve explained before, lenders used to determine whether someone was credit-worthy on a very personal basis. If you wanted a personal loan from the town banker, you might have to get recommendations from other trustworthy individuals in said town.
As banks and other lenders became national enterprises, it was less practical to check in with a potential client’s neighbors to find out if they returned the tools they borrowed in a timely manner.
That all changed in 1956 when mathematician Earl Isaac joined engineer Bill Fair to create Fair, Isaac, and Company. This new company began collecting financial information to create a standard credit scoring system that banks could reference when making their decisions.
FICO continued to develop their credit scoring methods and in 1989, they introduced the modern FICO Score. The FICO credit score uses information gathered by the three major credit bureaus, Experian, Equifax, and TransUnion, to generate a number between 300 and 850.
Cut to 2006, when those three credit bureaus decided they wanted to offer a score of their own to compete with the FICO score. They jointly created the VantageScore using their own distinct formula.
“Originally it was meant to be a much more consumer-friendly score, based on the rating similar to school grades (A, B, C, D, F) rather than FICO’s 300-850,” explained Todd Christensen, education manager for Money Fit (@MoneyFitbyDRS). “Those grades were based on a 501 to 990 scale. The more recent iterations use a scale that’s much more similar to FICO’s score.”
FICO took some issues with all of this and sued the company that administers VantageScore. After years in court, VantageScore emerged victorious and now stands as an alternative to FICO scores that lenders may consider.
The Vantage advantage.
Now that you know the history of the two credit scores, both alike in dignity, how do they differ today?
“VantageScores are grouped into six categories and each category has a different influence on the credit score,” advised Katie Ross, Education and Development Manager at American Consumer Credit Counseling (@TalkCentsBlog). “VantageScore is able to get a score from one month’s history and an account that that has reported at least once in the last 24 months.”
This is in contrast with the FICO score, which requires at least six months of credit history to generate a score. The factors that go into creating a VantageScore are also not broken down in terms of percentages like they are for your FICO score.
Ross told us roughly how heavily the different VantageScore factors are weighted:
“Payment history: extremely influential.
“Age and type of credit: highly influential.
“Percentage of credit limit used: highly influential.
“Total balances and debt: moderately influential.
“Recent credit behavior and inquiries: less influential.
“Available credit: less influential.”
So are VantageScores a better way to assess credit-worthiness than FICO Scores? It’s up for debate, though you likely won’t have a choice in the matter unless you’re the lender in a potential loan transaction.
“The problem is, it is essentially for ‘educational purposes’ only, since no lenders that I know of actually use the score in their credit-based decisions,” Christensen told us. “Still, it can serve some great purposes to help consumers.”
That may be quickly changing if VantageScore itself is to be believed. They’ve found that there has been a 300 percent increase in use by lenders and other individuals or institutions looking to review applicants’ credit scores. That’s why you might as well try to improve your VantageScore as well.
How to take advantage of VantageScore.
Thankfully, the steps you’ll take to improve your VantageScore are all pretty similar to the steps you’d take to improve your FICO score.
We’ll let Ross list those steps:
“Make payments on time.
“Pay off your credit cards in full each month–not just the minimum!
“Avoid credit card debt. Only spend what you can afford.
“Use credit for small, routine purchases and pay them off immediately.
“Limit the number of open accounts.
“Check credit reports & remove errors.
“Beware of unsolicited increases to your credit limit.
“Don’t max out your cards. Maintain a good credit utilization ratio (don’t exceed 30% of available credit).”
It might be hard enough keeping track of one credit score. Thankfully, as long as you’re paying your bills on time and using your credit responsibly, both of your scores should grow.
Your credit score is important.
Good credit is the foundation for a positive financial outlook. With a healthy score, you can borrow more money at lower rates and qualify for the best credit cards. Not only that, but it’ll help you get that sweet new apartment you have your eye on.
Author and Accredited Financial Counselor®, Todd R. Christensen, MIM, MA, is Education Manager at Money Fit (@MoneyFitbyDRS) by DRS, Inc, a nationwide nonprofit financial wellness and credit counseling agency. Todd develops educational programs and produces materials that teach personal financial skills and responsibilities to all ages. Having facilitated nearly two thousand workshops since 2004 on the fundamentals of effective money management, he based his first book, Everyday Money for Everyday People (2014), on the discussions, tips, stories and ideas shared by the tens of thousands of individuals and couples in attendance.
Katie Ross joined the American Consumer Credit Counseling (@TalkCentsBlog) management team in 2002 and is currently responsible for organizing and implementing high-performance development initiatives designed to increase consumer financial awareness. Ms. Ross’s main focus is to conceptualize the creative strategic programming for ACCC’s client base and national base to ensure a maximum level of educational programs that support and cultivate ACCC’s organization.
Does Medical Debt Really Go Away After Seven Years?
Like all urban myths, the “seven-year rule” does contain a small kernel of truth. But sorry, folks, it’s just not that easy.
Here on the OppLoans Financial Sense Blog, we’ve written about all kinds of debt. Payday loan debt. Student debt. Blood debts. (Okay, maybe not that last one.) And while there are always going to be some differences between the ways different kinds of debt are handled, for the most part, it’s all pretty much the same.
But recently one of our writers shared a story regarding medical debt that had us a little bit floored. We decided to let her tell it firsthand. She writes:
I was scrolling on Facebook a few months ago when a post from a friend who’d been having medical issues caught my eye. She was uninsured and had for the past few months been dealing with a chronic illness that left her in and out of the emergency room on a weekly basis. The post was a photo of her latest hospital bill, a whopping $60,000 charge she had absolutely no way to pay.
“File this under ‘things I’ll be ignoring for the rest of my life,'” she wrote, ending with a laugh-cry emoji that seemed to perfectly encapsulate the futility of her situation. In the comments below, dozens friends and family expressed shock and sympathy for her plight, and I noticed a theme. Many of the commenters seemed to think that she didn’t NEED to pay off those bills.
“Don’t worry about it,” wrote one man. “Medical debt disappears after seven years. You’ll have bad credit until then but after the seven-year mark you’ll be home free!”
This comment had several likes and affirmations under it. I sat there staring at it for a few moments, wondering why this idea seemed to have so much consensus behind it. It couldn’t possibly be true, right? Why even bill anyone for medical services if they’re not actually required to pay that balance off?
Well, spurred by the popularity of this strange belief, we did some research. Unfortunately for our coworker’s friend, and all the fervent believers in the seven-year rule, it’s not quite that simple. However…
The seven-year figure DOES come from somewhere
The belief that medical debt will magically disappear after seven years might not be entirely accurate, but there are actually laws in place that limit the amount of time that any unpaid bill can stay on your credit report.
According to provisions in the Fair Credit Reporting Act, most accounts that go into collection can only be reported on your credit report for up to seven years. After that, they can’t negatively affect your credit score and shove potential lenders and landlords towards the door.
There are, of course, some exceptions to this rule. Chapter 7 bankruptcy filings stay on your credit report for 10 years. Judgements stay either seven years or until the statute of limitations in your state is up, whichever is longer. Unpaid student debt? That will stay on your credit report for-ev-er.
But medical debt won’t! While unpaid medical bills will come off your credit report after seven years, you’re still legally responsible for them. Taking those debts off your report just means they will no longer be held against you when you apply for a loan, an apartment, or a job, which is definitely a good thing.
There’s also a six-month buffer period during which new medical debt cannot appear on your report
Additionally, a new law went into effect in September 2017 states requires the three major credit bureaus—Equifax, Experian and TransUnion—to now give patients a 180-day grace period to resolve their medical debt before it shows up on their credit reports.
According to a report from the Consumer Financial Protection Bureau, one out of five credit reports contain unpaid medical debt, and per Experian, the six-month rule was, “designed to help people with a common dilemma—the need for time to make necessary payments or finalize issues with insurers. Once a medical debt gets paid, check that the listed account is removed from your credit report. If an account is 180 days old and unpaid, it will be added to a consumer’s credit file.”
“Under the current system, consumers can find themselves trapped in limbo, stuck with bills while waiting for their healthcare provider to reimburse them for approved expenses. During this period, any gathered debts that are left unpaid can hurt their credit scores,” wrote Matt Tatham on the Experian blog back in August.
State-by-state statutes of limitations on debt collection may also fuel the seven-year myth
Many states have laws on the books that limit the amount of time that a debt is enforceable or the amount of time that collectors, lenders, or creditors have to use the court system to legally force you to pay for a debt.
Different categories of debt have different limits, but in general, most debt falls into these four categories:
Oral Agreement: A debt agreement made verbally with no written documentation.
Written Contract: A debt agreement made in writing and signed by both parties. Medical debt is a written contract.
Promissory Note: A debt agreement made in writing and signed by both parties which includes a deadline for payback and information on the interest rate. Most mortgages and student loans are promissory notes.
An Open-Ended Agreement: A debt agreement made in writing on an account with a revolving balance. Credit cards are open-ended agreements.
In general, the statute of limitations on debt collection starts from the last payment you make. Many debt collectors will continue to call and try an enforce collection even after the statute is up because they know most people aren’t aware of their rights under these laws.
It’s important to note, however, that just because you can’t be legally sued to pay up after the statute of limitations expires, that doesn’t mean the debt no longer exists. It’s still there, and it’s still your responsibility. Creditors can try to take you to court over the debt, but if you can prove the statute of limitations has passed, they won’t win their lawsuit against you.
So can you just ignore medical debt until it stops affecting your life?
In theory, sure. If you can deal with years of bad credit and harassing phone calls, and if you can somehow avoid getting sued for your debt before the statute of limitations on your medical debt is up, you may reach a point about a decade in the future where you’re no longer hounded every day about paying off those old hospital bills. But it’s never going to truly disappear.
If you don’t want to deal with years of hassle, you might want to try and work something out directly with the hospital. After all, a hospital is a business, and they need people to pay their bills so they can, in turn, pay their staff, buy new medicine and equipment, and keep helping people recover from illnesses and injuries. Most hospitals will be willing to work with you to reduce your debt or make a settlement payment at a fraction of the cost.
“I generally don’t recommend negotiating small bills such as copays, but when your out-of-pocket costs start in the hundreds, then it may make sense. It is as simple as asking the hospital or doctor’s office if they have a cash payment policy. This can be a starting point. You can also propose a discount to them as well. Let’s say the bill is $500. You can say, ‘All I can pay is $300. Is that acceptable to you?’ While some may push back, most won’t.”
To learn more about dealing with medical expenses, check out these related posts and articles from OppLoans:
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