• How Do Unpaid Medical Bills Affect My Credit?

    Brandon Cornett

    By Brandon Cornett
    © 2011 All rights reserved

    Reader question: "I just found out that I have unpaid medical bills in my credit reports. How badly does this kind of thing affect my FICO credit score? And is it true that they can follow me for seven years or more?"

    In a nutshell: Yes, it can hurt your credit score. And yes, it can remain on your report for a period of up to seven years. The amount of damage it does will vary, based on the status of the unpaid account. Keep reading below for more detailed information.

    A lot of people have been asking about unpaid medical bills lately. Sadly, it's indicative of a common problem in the United States. With the rising costs of health care, and the pitiful state of our insurance companies, a lot of Americans are unable to pay their medical bills.

    How common is it? According to a study by the Federal Reserve, ("An Overview of Consumer Data and Credit Reporting"), almost half of all collection accounts that show up on consumer credit reports are the result of unpaid hospital bills. And many of these people claim they had no idea they were past due on any hospital bills. In some cases, the labyrinth of medical billing and insurance claims leaves the consumer in the dark.

    This can have a cumulative effect that snowballs into other problems. Unpaid bills of any kind (including medical charges) can wind up on your credit bureau reports. These negative entries can have a damaging affect on your FICO credit score. In turn, a lower FICO score can make it harder to qualify for certain types of financing, particularly mortgage loans.

    Lenders and creditors also assign interest rates partly based on the borrower's credit score. So a lower score can result in higher interest charges on everything from car loans to credit cards.

    And it all starts with those unpaid medical bills. This is the snowball effect I mentioned earlier. This is why it's important to stay ahead of this problem, as much as possible. The ideal scenario is to prevent it from happening in the first place. When it does happen, the next-best scenario is to clean up the damage ASAP.

    How Medical Bills Can Affect Your Credit

    Past-due medical accounts can be sent to collection like any other type of bill. They can also be reported to the three credit-reporting agencies that compile data on U.S. consumers (Experian, TransUnion and Equifax). These actions can subsequently lower your credit score.

    Generally speaking, unpaid medical bills do not hurt your score as much as an unpaid credit card. But it can still lower your score. There are too many variables involved for me to give you an exact number of points your score might drop. The only thing I can say for certain is that your score will suffer as a result of unpaid medical bills.

    How much your score drops will depend on (A) whether it's a pattern or an isolated event, (B) the length of your credit history, (C) how high or low your score is when the negative item "hits" your reports.

    According to a New York Times article from 2010: "[Debt] collections are weighted more heavily than other unpaid or late bills ... They will have a more serious effect on your credit score.

    You didn't mention anything about debt collectors. So I'm assuming your past-due account hasn't reached that stage. If your medial bills are from several years ago, but there's no record of a debt-collection attempt in your credit reports, they were probably never sent to a collection agency. That would be good news.

    But if the unpaid bills happened more recently, there's a change they might be sent to a debt collector in the near future. You should work to avoid this, if at all possible. As mentioned in the NY Times quote above, that's when the real credit-score damage occurs.

    The 7-Year Rule for Reporting

    And this brings us to your next question: Is it true that unpaid medical bills can follow you for seven years? Yes, that is the reporting limit for most negative entries. Derogatory information that is reported to the reporting bureaus (TransUnion, Equifax and Experian) can remain in your credit file for a period of up to seven years. This is a legal requirement enforced by the Federal Trade Commission (FTC). Bankruptcy filings can remain for up to ten years. But for everything else, the ten-year rule applies.

    Related article:
    How long things can stay on your credit report

    In theory, an "expired" item should be removed from your reports automatically. But it doesn't always happen this way. Sometimes, they can stay on there longer than they are supposed to. This is when you have legal grounds to dispute the negative entry on your report.

    How to Dispute a Negative Item

    The Fair Credit Reporting Act (FCRA) is a federal law in the U.S. that sets guidelines on how consumer credit information can be maintained and reported. In other words, it's the law that governs the three reporting agencies -- TransUnion, Experian and Equifax.

    According to this law, most negative information can only be maintained on your credit report for up to seven years. A bankruptcy filing can stay on there longer, for a period of up to ten years. But most things have to come off your credit report after seven years (usually from the date the account was reported to the credit bureaus).

    So is it possible to have unpaid medical bills or other negative items removed before the seven-year window has lapsed? Yes. In the case of errors, you can dispute the negative item with the reporting agency that produced that particular report. Also, if there's a duplicate entry on your credit report, you can typically dispute that to have it corrected.

    Here's an article that explains how to dispute these entries.

    But what if the negative information is legitimate and accurate? What if you really do have unpaid medical bills in your past? In this case, it's much harder to have them removed from your report before the seven years is up ... unless there are some kind of extenuating circumstances involved. I will leave that topic to the lawyers though.

    Payment Plans for Hospital Bills

    An ounce of prevention is worth a pound of cure. This old chestnut applies to medical billing as well. The best way to protect your credit is by preventing bills from becoming past due. One of the ways you can do this is by using a payment plan. Most medical billing departments will allow you to pay a bill in smaller installments, spread over the course of a year.

    I did this recently. I had a bill for about $900. I called the billing department and gave them my name, and the lady asked if I would like to set up a payment plan. She split it up into 12 monthly payments of $75, and said she would send me an invoice each month as a reminder.

    In some cases, unpaid medical bills can "slip under the radar." The person doesn't even know about them until a debt collector calls, or when the past-due account shows up on the credit reports. This often happens when the person has a change of address, or when the hospital makes very little effort to contact the person (choosing instead to sell the debt to a collection agency). In such cases, the unpaid debt has already affected the person's credit score. So the time for preventative measures has passed.