Personal Finance and Investing

Did you know that medical debt can ruin a consumer’s credit? Some people believe that medical debt is excluded from the credit calculation, or they don’t even think about the unintended consequences of medical debt. Yet every year millions of people find themselves faced with medical debt collectors or medical debts that are long term and too high to ever pay off.

In an article that appeared in the Dallas Morning News (25-October-2009) there is a story about Gayle and Steve Smith. Mr. Smith had a heart attack during a period when he was uninsured. The couple found themselves with a $70,000 debt and no way to pay it. Eventually the hospital reduced its share of the bill but not before the account went to collection.

Now the couple are consumer advocates with a cause. They like to point out that, “Consumer debt is a choice, and medical debt is a forced circumstance.” In other words, you don’t make a choice to incur medical debt except when buying elective procedures. The Smiths now have a black mark on their credit report as a result of the medical debt being turned over to a collection agency.

The consequences of the negative credit item can be long term. The medical debt could not be avoided but that doesn’t matter in the financial analysis. The fact the account went to collection is what matters in terms of credit scores, and a black mark can lower the score. Once the credit score is lowered it can be much more difficult to obtain other loans or credit or lead to higher interest rates being charged on loans that are approved.

The stand taken by consumer advocates is that medical debt should be treated differently than voluntary debt. You don’t incur medical debt due to poor financial planning. You don’t have control over when the debt is incurred either. You don’t have any control over what is charged either. Unlike credit card debt or other loans, the consumer cannot limit charges.

Since there is no control over this type of debt, it does not seem fair to many people that it can lead to a poor credit rating for 7 years. The three major credit reporting agencies all include medical debt in their calculations of the credit score. They are also fighting against changes being proposed by consumer advocates.

There is a push on by consumer advocates to change the law. Their goal is to have medical debt excluded from the credit score calculation once the debt is cleared. In this way the consumer is not penalized for 7 years when a medical debt is subjected to collection procedures, and it rewards consumers who get their debt cleared.

The problem of medical debt is widespread. As the numbers of unemployed and uninsured grows, the number of medical debt problems has grown also. Another factor leading to increasing medical debt issues is the rising costs of health care. A quick trip to an emergency room can lead to thousands of dollars in charges.

Even people with insurance can end up owing a significant amount in medical bills. In many cases, health insurance only covers a portion of medical expenses leaving a balance due by the consumer.

US Representative Mary Jo Kilroy has introduced a bill that requires credit bureau agencies to exclude paid-off or cleared medical debt from the FICO score calculation. But this bill goes even further by requiring the debt to be completely removed from the credit bureau account within 30 days after the debt is paid. The bill has 44 co-sponsors and the support of the Consumers Union.

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