Medical Debt and Your Credit Report

Medical Bills and Your Credit Report

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Even if you're fortunate enough to have health insurance, you can still accumulate some medical bills, which, if left unpaid, can negatively affect your credit report. Understanding how this can happen will enable you to take steps to help keep your personal finances strong long after you've dealt with an emergency health issue.

When a sudden health problem affects you or someone in your family, you need to focus on getting better — not paying medical bills and worrying about your credit. Still, even if you have good medical insurance coverage, you may have to deal with significant medical bills. Hospital bills, for example, can add up quickly, and failing to pay medical bills on time can hurt your credit.

Remember that having health insurance doesn't mean all your medical expenses get paid. Your doctor may prescribe procedures and medications that aren't covered by your insurance. In fact, your condition may be so serious that you still need costly medical treatments after your insurance coverage is exhausted. And any resulting medical costs that go beyond your coverage are, of course, your responsibility.

Medical bills that aren't your responsibility can hurt your credit report. The health insurance system is large and complex, and it's not uncommon for clerical or computer errors to cause insurance companies to overlook payment. Honest errors happen, and honest people can get hurt by these errors. That's why you have to make certain not only that you understand your credit report, but also that you ensure that all your personal and mailing information remains current. Not informing your healthcare provider about an address change can result in unpaid medical or hospital bills — bills you may not even be aware you owe if you never receive them. In any case, unpaid medical bills will eventually appear on your credit history. And regardless of the circumstances, removing that negative information from your permanent credit record could prove difficult.

When a medical bill-paying error happens, there are a variety of ways your credit can get hurt: Imagine, for example, you have a health problem that results in $20,000 of hospital bills that your insurance company never sees. The hospital, having never been paid by your insurance company (who never actually received the bills), hands the medical debt over to a collection agency. Meanwhile, you've applied for a home equity loan, and your credit report specifically notes that you are $20,000 delinquent on medical bill payments. Your bank or lending institution (not knowing the truth about the billing error) decides that your credit rating isn't up to par, and it determines that you have to pay a higher interest rate on your loan. And in extreme cases, such an error can lead to you being flatly denied for credit altogether.

Even smaller medical bills that remain unpaid can serve as a red flag on your credit report for up to seven years. Remember that your credit score is like a report card for your credit history. A better credit score can mean lower interest rates on a loan for buying a car, purchasing a house or even paying off medical debt. However, if you neglect to pay medical bills today — even those smaller bills that don't seem like much when you receive them — you'll be paying higher interest rates on your loans tomorrow. Honest mistakes and clerical errors are one thing, but ignoring your medical bills completely just isn't a good idea.

Now for some good news and some timely tips: You can avoid some of the headaches that result from medical bill mismanagement by keeping a close eye on your credit and being proactive in credit matters. Here are some quick tips to consider:

  • Be an informed patient. Ask your medical provider and your insurance company for copies of all relevant paperwork. Make sure the bills that are supposed to get paid do get paid.

  • Don't ignore paying a medical bill — no matter how small. Sure, it's tempting to simply tear up bills, but the charges will only find their way back to you.

  • If you must take on medical debt, consider hiring a financial adviser. A skilled professional financial planner/adviser can help set up a long-term plan for dealing with significant bills that makes sense for you and your overall financial health.

A medical emergency can turn your life upside down, but your financial life and your credit matters don't have to suffer too. Can medical bills hurt your credit report? Yes, but taking steps to keep your credit report healthy if unexpected medical debt does occur is a smart way to protect your entire financial future — and keep track of your credit history along with it.

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