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New rules will limit credit report damage from medical debt

Did you know that over half the debt appearing on Americans' credit reports is medical debt? Unfortunately, a ding on your credit report can cost you in terms of credit rejections, additional interest and job or housing consequences.

The average that Americans have in past-due medical debt that is in collections is only $579, according to the latest numbers from the Consumer Financial Protection Bureau. Yet 43 million Americans are in collections for medical debt, and for 15 million of them, medical debt is their only credit problem.

"More people who typically would have been a good credit risk are now saddled with big bills," says the policy director at the Healthcare Financial Management Association.

One reason for this is the growth of high-deductible health plans, he adds. These create substantial out-of-pocket responsibility for consumers, which often puts the cost of healthcare beyond what people can afford.

Another issue is lack of standardization in hospital and physician billing and collections. While many clinics and hospitals wait about six months before sending a past-due bill to collections, many do so much earlier. Some sell past-due bills to debt buyers or send them to collection agencies as early as 30 to 60 days past their due date.

Yet 30 to 60 days may not be enough time to receive a final decision from an insurance company, much less to appeal an adverse decision.

Credit reporting agencies and credit scorers are all geared toward trying to predict who is a risky bet for lending. Yet the credit scoring agencies FICO and VantageScore don't take medical debt as seriously as other types of past-due bills. Their scoring models penalize medical debt much less because it's less likely to indicate a future default than other types of debt.

New rules will make medical debt hurt your credit report less

Two new rules are going in to effect on Sept. 15 that will limit the damage a stray medical bill can do to your credit report. The rules were achieved through settlements with 32 state attorneys general but will apply nationwide.

First, the three major credit reporting agencies will be required to wait six months before including a past-due medical bill on a consumer's credit report. That's intended to give consumers time to achieve final resolutions with insurance companies.

Second, the credit agencies will have to remove these debts from credit reports once they are paid. In the past, the creditor or the consumer would have had to take action before the debt would be removed.

The six-month waiting period is "a big step forward toward a more equitable process," says the executive director of the Financial Hope Collaborative at Creighton University.

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