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When Does Medical Debt Affect Credit Scores?

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By Eva Norlyk Smith, Ph.D.
December 11, 2009

Few things can throw one’s personal finances off as quickly and unexpectedly as medical expenses. Unfortunately, unlike personal debt or consumer debt, medical debt is something that people generally have no control over.

With the economy in the doldrums, more Americans are falling behind on their medical bills. According to a study by the Commonwealth Fund, between 2005 to 2007, the number of adults in the U.S. with medical debt increased from 34 percent to 41 percent, about 72 million people or almost half of all working adults.

If you’re concerned that medical debt might pull down your credit score and lead to bad credit, there’s good news and bad news. The good news is that medical debt doesn’t always lead to bad credit. The bad news is that when it does, it can continue to haunt your credit for years.

Here are the highlights of how medical debt affects your credit score.

Medical debt doesn’t hurt credit scores as much as credit card debt.
About 30% of your credit score is made up of what is known as your credit utilization ratio. This is a measure of how much of your available credit you use. The higher the percentage of available credit used, the higher the ratio. A high credit utilization ratio pulls your credit score down, because excess reliance on credit is taken as a sign that you’re having trouble making ends meet.

Unlike credit card debt, medical debt isn’t counted against a credit limit, and thus is not included in the credit utilization ratio. This means that just having outstanding medical bills won’t hurt your credit score—as long as you keep up with your payments.

Medical Debt Doesn’t Get Reported—Unless.
Unlike outstanding credit card debt, which credit card companies report to the credit rating agencies once a month, outstanding medical bills don’t get reported to the credit rating bureaus, unless you don’t pay them on time! If you default on your payments, the bill will be sent to a collection agency and from there the debt will head straight to your credit report, where it will be listed as a Collection Account as a Medical debt.

A full 35% of the credit score is made up of whether or not bills are paid on time, so delinquent medical bills do pull down your credit score. FICO scores penalize delinquent payments more than anything else, because statistically, anyone who has previously failed to meet their payment obligations is more likely to it again with other debt. How much it pulls it down depends on how strong the rest of the credit history is.

Delinquent Medical Debt Stays on Your Credit Report
Like the seven-year plaque, medical debt will continue to be listed on your credit report as bad debt for seven years. Unfortunately, under current laws, once it ends up there, it will continue to blot your credit report even though you later settle the debt.

Medical Debt Could Hurt Your Ability to Buy a House
Unpaid medical debt might affect your ability to get a mortgage for a house, not just by lowering your credit score, but also by affecting your debt-to-income ratio. Unlike credit card companies, which mainly rely on FICO scores to determine whether or not to approve someone for a credit card, mortgage lenders also take into account the debt-to-income ratio, i.e. the amount of recurring debt payments a person has in relation to his or her income.

The only way around this would be to make a repayment arrangement with creditors or collection agencies, which sets the monthly payments sufficiently low that they don’t increase the debt-to-income ratio so much that it disqualifies you from getting a mortgage.