Does Medical Debt Cause a Bad Credit Score?

Unexpected medical bills can wreck someone in the best financial shape and ruin his credit for the foreseeable future. This does not always happen, because medical debt is very common among Americans and hospitals are more forgiving, so they may not report your debt. However, you should not rely on the medical provider or credit agencies to give you a break.

Identification

Ignoring medical bills can drop your score like a rock. Like any other unpaid debt, the medical provider can charge off the balance and report it to the credit bureaus or, more likely, send it to a debt collector. Medical providers rarely report debts to the agencies themselves, because that requires added expenses and regulations the medical provider must follow. Collections accounts are one of the worst things for a credit score---worse than late payments, which can take more than 100 points off your score.

Considerations

Medical providers try to avoid heavy-handed tactics like employing a collections agency, according to Daniel Schorn of CBS News. Most hospitals are nonprofits, so they probably just add the unpaid bill to the rest of their outstanding debts and use the figure for fund-raising efforts or motivate Congress for more public medical assistance program payments from Medicare and Medicaid. For-profit hospitals might just accept the tax write-off they can take from bad debt.

Lenders Might Not Care

Lenders may overlook a poor credit score caused by a medical bill in collections. This is not to say that paying it off does not improve your chances at receiving a loan---lenders like to see borrowers who try to pay off any debt no matter how small or old.

Tip

You never want a collections or unpaid debt on your record, even if a lender ignores it, because other creditors might consider it a significant event. Negotiate with your medical provider before he decides to send the account to collections. Many doctors will work out a payment plan and even lower your bill if it prevents involving a debt collector, because they only receive a portion of the balance by sending it to a collector.