Last week brought great news for anyone dealing with big medical debts. Starting in July, any medical bills that you paid off in collection will get wiped off your credit report.
For millions of us, that’s a huge relief. Over 80 million Americans have faced medical bills they couldn’t afford and were sent to collectors. Aggressive collections can be painful enough, but the damage to your credit score, even after clearing the debt, can last for years.
A credit boost for millions
As a result of the recent decision, millions of Americans are likely to see their credit scores improve this summer.
There’s more good news, too. Here’s the three new actions taken by the major credit reporting agencies:
- The grace period before unpaid medical debt can appear on your credit history is extended from six months to a year;
- any medical debt under $500 will no longer be included at all, starting early next year; and as we just detailed,
- medical debts sent to collectors that you’ve already paid off will no longer be included on your credit report.
To be clear, unpaid medical bills can still end up in collections. If you don’t pay yours on time, or within the extended grace period, you could face aggressive tactics from collectors.
Medical debts outpace others
In 2021, the Consumer Financial Protection Agency (CFPB) found around $88 billion in medical debt on Americans’ credit reports. (That’s almost 58% of all debt reported with collectors.)
That number only includes debt in collections. It doesn’t account for bills charged to credit cards, personal loans or other debt tools–the kind of medical debt many of us are dealing with. But the move will wipe nearly 70% of medical debt from credit reports.
Starting July 1, Equifax, Experian and TransUnion will eliminate billions of dollars from the credit reports of Americans who faced medical bills they were unable to pay.
The good news comes following last year’s CFPB report arguing payments on medical bills aren’t good indicators of creditworthiness. Medical bills are almost always unexpected, arising from emergencies, so they’re not likely to demonstrate your ability to manage other debts, loans and credit.
How to deal with large medical bills
If you get a bill from a doctor, a hospital or other care provider, and you can’t afford to pay it, there are a few smart things to do.
- Try negotiating up front. Call the biller and see if they offer payment plans. Instead of paying a lump sum all at once, regular negotiated payments could be a less painful, immediate solution.
- Tap into your savings. Set aside other priorities for your savings, like vacations, cars or even weddings. Use those nest eggs to pay off a big medical bill. It’s better than not paying and seeing the debt in collections. And a drained savings account doesn’t impact your credit score, which can raise interest rates on future credit cards and loans.
- Avoid using credit cards. In times of health crises, financial decisions aren’t easy to make. Credit cards can look like a convenient option, a fast way to deal with paying off the bill. But interest rates on credit cards are among the highest you can face, and you may need your cards for new, emergency expenses.
- Consider a personal loan. Loan applications may not be so easy under the stress of medical emergencies. But you might get a lower rate than charging it to your credit cards, plus lower, fixed re-payments over the months ahead.
What you can do now
Set up an emergency fund. When a big bill arrives in the mail, it’s probably too late. So start an emergency fund now and add to it with regular payments, even minor ones, week by week. Most experts recommend an emergency fund that can cover three to six months of living expenses. That much can help tackle large medical bills.
Looking for more?
Here’s a few resources that can deepen your understanding of medical debt:
Credit Companies Will Remove Stains From Repaid Medical Debts (New York Times)
How Bright can help
Bright can build an emergency fund faster than most Americans can on their own. Just set up a Bright Plan, set a goal for your fund, and Bright will add to it week by week, when it makes sense for you, adjusting to your finances automatically.
Bright can also pay off your cards faster, making payments for you, at a pace that works for you and adjusting automatically.
If you don’t have it yet, download the Bright Money app from the App Store or Google Play, Connect your cards and your checking account, set a few goals and let Bright get to work.