Medical debts that go unpaid land on your credit reports and directly impact your credit score. A new bill is looking for support from both party lines that would help eliminate medical collection accounts from a person’s credit report. The bill would apply to medical debts under 2500.00, and if settled or paid - would be completely expunged from your credit reports. Certainly a motivation to pay it, right? But wait. Not everyone is happy about this proposed change.
Supporters and detractors on both sides of the credit industry fence have plenty to say about it. Some advocates of the bill feel its a move in the right direction because, as one mortgage lender who proposed the bill said, 40% of his applicants had medical collections — and people don’t choose to get sick. On the other hand, some feel it would water down the credit analysis of a person and cause higher rates across the board for the rest of us who have good credit. In essence, hiding that person’s risk factor by erasing the collections.
Today, medical debt that has been turned over to collection agencies can remain on a person’s credit report for up to seven years, even if the debt eventually gets paid or settled for less than the full amount. That can hurt the person’s ability to get a home, car or other loan.
“This is single-handedly holding our economy back,” say Rodney Anderson, a Texas mortgage banker who personally hired lobbyists to get a bill sponsored after discovering that more than 40 percent of the people who applied for mortgages with his company had medical debt on their credit reports. Many of these debts were $100 or less but often caused a steep drop in an applicant’s credit score.
Sponsors of the bill say medical debt is unlike other debt because people don’t choose to get sick or injured. They add that many medical debts reported to collection are the result of billing errors and insurance disputes.
On the other hand;
John Ulzheimer, president of consumer education for SmartCredit.com, opposes the bill because it would further erode the integrity of the nation’s credit-reporting and -scoring system, to the detriment of lenders and of borrowers who pay their debts on time.
He notes that in February, the Internal Revenue Service announced that it would remove tax liens from people’s credit reports, upon request, if they pay their federal tax debt in full or enter into a direct debit installment agreement.
“Eventually the only thing that’s going to be left on your credit report is your name,” Ulzheimer says.
This will hurt responsible consumers, he says, because “if you give me 10 people and one is risky, but you have watered down the tool I use to assess risk, I’m going to charge everyone a higher interest rate. How is that fair for the nine others who are not going to default?”
The majority of medical debts that land in collections are often caused by erroneous medical billing and errors on the part of the medical field – not the consumer’s refusal to pay – although there are plenty of both. People who have spotless credit suddenly find themselves with a medical collection ding – and often with no warning. If a person had a percentage of their medical bill that went unpaid or was not covered by their insurance plan and the person has since relocated, the debt could go straight to their credit reports without their knowledge. Those are the people this bill would help protect but what about those who simply don’t pay their medical bills. Is erasing it for them fair – and how do you determine who had good faith and who didn’t?
While there is probably plenty of details to still be worked out, having some lenience with medical collections could work out great for everyone involved if it motivated more people to pay their share and caused the insurance industry to set tighter standards to avoid billing errors in the first place. Unlike credit cards, people don’t choose to open a medical debt so it makes sense to have some exceptions for those — especially since they seem to be one of the biggest problems in affecting people’s ability to secure a home or auto loan.
The latest FICO scoring algorithm already dismisses medical bills under $100.00 from its equation but not everyone uses that latest version, so its still a big problem. A bill would set standards on how the debts are treated just as the FDCPA sets standards for bill collectors. Perhaps a Fair Medical Billing Act would be precisely whats needed.
One also has to wonder how this type of change will affect the collectors and their ability/desire to settle debts for less. Would they hold out for more money because they know you want that deletion oh, so bad. Would they increase their collection efforts (more aggressive) within that first 30 days to to use the record deletion offer as a tool? Would this cause more VOD violations?
As the article points out, the IRS announced in February that they will remove (Federal) tax liens from a person’s credit report [at their request] if they pay the debt, so is this trend of paying and deleting - just putting lipstick on the pig. Prettying up an ugly credit report. Is that fair to lenders? We’ll have to wait and see but one thing is for sure – we can bet it will continue to be heavily debated by the credit industry and consumers.
