Inside Money: Medical debt and your credit score

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The No. 1 cause of bankruptcy is unpaid medical bills — outpacing those caused by mortgage debt and credit card debt — according to a recent study by NerdWallet.com, a price comparison website.

About 40 percent of Americans reported a lower credit score in 2012 because of unpaid medical bills, according to the Federal Reserve.

And a May 2014 report by the Consumer Financial Protection Bureau said that consumer credit scores are overly penalized by medical debt.

But there’s some good news for those who have big doctor and hospital bills in collections: The biggest credit scoring models will no longer give the same weight to medical debt.

“The biggest change under FICO 9 and VantageScore 3 (credit scoring models) is that paid or settled collection accounts — ones where the balance owed is zero — will be bypassed by the score, says Gerri Detweiler, the head of consumer education for Credit.com. This change, she says, applies for all collection accounts.

FICO also will differentiate between medical and non-medical collections so consumers who just have a medical collection account on their credit report will likely have a higher score after this change, Detweiler says, noting that medical debt is rarely reported unless it is in collections.

“A higher credit score can translate into lower interest rate loans for such items as autos and lower mortgage interest rates, which can save thousands of dollars over the life of (a) mortgage,” says Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

And while some with outstanding medical expenses simply haven’t paid their bills, others are caught up in the bureaucracy, insurance company confusion or are just trying to untangle billing errors.

“Sometimes it’s hard to know how much and when you are supposed to pay it because you are waiting for insurance to process the bill. Or you can get bills from multiple providers from the same visit,” Detweiler says.

You may discover you owe far more due to co-pays, deductibles, out-of-pocket expenses or denied claims. “Or you may never even know you owe something until you hear from a collection agency,” Detweiler says.

But under our current system, says Detweiler, once it winds up with a collection agency, the damage is probably already done.

“Under most credit scoring models used today, paying a collection account doesn’t improve your credit scores in the short term, so this will go a long way to helping protect consumers against unfair credit damage due to medical bills,” she says.

This change in credit scores doesn’t mean you don’t have to worry about medical debt in collections. Not every credit scoring model will make the change, and those that do make the change will need time before it’s reflected in consumer scores.

WHAT TO DO

If you find a mistake in a medical bill, or you have a bill that you’re unable to pay, don’t ignore it. Here are some tips:

• Make sure the bill is correct, and if you’re not sure, ask questions.

• Contact your health insurance company to make sure it is covering all of the charges it is responsible for paying, Papetti says.

• Call the biller before it goes to collections, even if you can’t pay. “If you are unable to pay the entire amount, contact the medical provider to see if a payment plan can be worked out,” Papetti says. They’d rather take $25 per month than nothing at all.

• Ask the medical provider if you qualify for charity care.

• Try to negotiate a lower fee before you have the services, if it’s not an emergency.

If you are overwhelmed, consider hiring a medical billing advocate, Papetti says. This kind of pro will negotiate a lower amount to be paid or to establish a payment plan you can afford. An advocate will charge either an hourly fee or receive 15 percent to 35 percent of the amount saved. Find an advocate through the National Association of Healthcare Advocacy Consultants at nahac.memberlodge.com.

Karin Price Mueller, the founder of NJMoneyHelp.com, writes the Bamboozled consumer affairs column for The Star-Ledger, and the Money and Biz Brain columns for Inside Jersey. Send your money questions to her at Bamboozled@njadvancemedia.com.

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