How Medical Collections Hurt Credit Scores

We all know that ignoring our credit card bills will most likely lead to collections. We also know that if we break a lease and skip out on the last months rent, this too could lead to collections. What if we don’t pay a utility or phone bill for several months? Not only would we end up with no power or phone service, but you guessed it, we’d probably end up with collections as well. What we don’t expect is inefficient communication between our doctors and our insurance company damaging our credit and credit scores.

Between uninsured Americans and the bureaucratic red tape between large healthcare companies and insurance providers, medical collections have become increasingly common in consumer credit reports. The problem is that a lot of consumers believe that medical collections are overlooked or excluded from their credit and credit scores. Unfortunately, medical collections are no different than other types of collections and can wreak havoc on your credit scores just as easily. The most frustrating thing with medical collections is that in most cases the consumer isn’t the cause, yet they end up paying the price as though it were.

One reason for the large misconception about medical collections is due to how some industries view them. While medical collections hurt your credit scores just as badly as other collections, most industries don’t view medical collections as negatively as other collections. The mortgage industry in particular, will frown on unpaid collections but tend to overlook or turn a blind eye on unpaid medical collections. Even FHA guidelines aren’t overly concerned with medical collections when determining a consumer’s eligibility for a mortgage loan. This begs the question, “why do credit scoring models view medical collections the same way they view non-medical collections?” There are a couple of reasons:

As long as the companies that build the credit scoring models continue to treat medical collections as normal collections, they’ll continue to hurt your scores. Unfortunately, the blame doesn’t lie solely on the credit scoring models…the credit reporting agencies are also part of the problem. Read on…
Credit reporting agencies are just as guilty for the way medical collections are handled because they allow collection agencies to report the medical collections. If they are reported in your credit report the credit scoring models will see these accounts and they will continue to damage your scores. If the credit bureaus would implement a policy that would NOT allow medical collections to be reported if the collections were caused by insurance claim errors. This would require the doctor’s office and the collector to prove that the collection is valid before it could be reported which is exactly what the Fair Credit Reporting Act was intended to do. Sadly, this will never happen. Keep reading…
If the credit scoring companies and the credit bureaus ever did change the negative impact of medical collections on credit scores, the collection agencies would hit the roof. Think about it, if medical collections didn’t hurt your score, what motivation would people have top pay them? The problem is that collection agencies represent a hefty client base for the bureaus and generate a pretty large revenue stream. If the credit bureaus ever decided to change how medical collections are reported or treated, you can bet that the collection agencies would throw their proverbial weight around.
So what does this mean to you and how can you keep this from happening? This is a tough one because there’s really no easy answer. The best option would be to avoid medical collections if at all possible. This may mean paying for medical debts until your insurance company processes the claim and pays the bill. The problem with this solution is that not everyone has the funds to do so. Another option might be charging the services to a credit card but this too can cause problems because higher utilization on your credit cards can cause your credit scores to fall.

In this case there’s just not a simple solution. Until the credit industry makes changes to flaws in the system, consumers with medical collections caused by insurance company incompetence will continue to suffer from poor credit scores.

 by Edward Jamison, Esq.