The impact of medical debt on your credit reports and VantageScore credit scores

By: John Ulzheimer
Date: April 16, 2021

The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore Solutions, LLC.

One of the common variances across credit scoring models is how they treat debt. Installment debt, revolving debt, open debt, past due debt...not all debt is equally predictive of risk which is why not all debt is treated the same way by scoring models. And due to the effects of COVID-19 there may be millions of consumers who have incurred yet another style of debt over the last 18 months, unpaid medical debt.

To be clear, medical debt does not commonly appear on credit reports as furnished by your doctor’s office or other medical service provider. Medical debt, normally appears on credit reports when it goes into default and is then reported by a 3rd party debt collector or, more commonly, a collection agency.

Medical collections present a complicated and polarizing dilemma. On one hand, consumers don’t choose to get into medical debt like they choose to get into credit card or other consumer credit debts. On the other hand, medical service providers deserve to be paid for their services just like any lender deserves to be paid for their extensions of credit. Regardless of the circumstances around medical debt, the credit reporting and scoring communities have made considerable changes to buffer and reduce the impact of medical debts.

National Consumer Assistance Plan

Several years ago, the credit reporting industry enhanced credit report accuracy and fairness by implementing the National Consumer Assistance Plan or, “NCAP.” NCAP, among other things, implemented a new standard as it pertained to the furnishing of medical collection accounts.

Specifically, medical collection accounts cannot be reported by debt collectors until at least 180 days after the debt goes into default with the original service provider. This half year mandatory waiting period is designed to allow for insurance claims to process; thus, eliminating the need for a collection account to be reported on a person’s credit reports. And, even if a medical collection is reported by a debt collector, the account must be coded as being “medical” in nature in adherence with credit industry standards and Section 623 of the Fair Credit Reporting Act.

Finally, NCAP also requires debt collectors to regularly update unresolved collection accounts and requires the deletion of any previously reported medical collections that have been paid or are in the process of being paid by insurance coverage.

And, as it pertains to credit scores, once a collection account has been removed from a credit report it cannot have any lingering impact on a person’s credit scores.

Changes in Score Treatment of Collections and Medical Debts

Whenever credit scoring models are redeveloped, a process that occurs every few years, there are normally meaningful changes in how certain credit report entries are considered. VantageScore’s credit scores are no different in this respect. In fact, you can track the chronology of changes across VantageScore generations from its inception in 2006 to present, as it pertains to how the models consider various collection agency accounts, including medical collections.

VantageScore 1.0, 2.0, 3.0 and 4.0, which is all of the VantageScore credit scores, ignore or “bypass” medical debts if they are directly furnished by a medical facility or service provider. Again, this practice is unusual as the original service provider doesn’t normally report their debts directly to the credit reporting companies. The practical impact of this is that if medical debts are reported by the medical facility they have no impact, at all, on any generation of the VantageScore credit score.

VantageScore 3.0 and 4.0, the two most contemporary generations of the VantageScore credit score, ignore all collection accounts that have been paid. This, of course, includes any medical collections on your credit reports that have also been paid.

NOTE: Keep in mind that “paid”, “settled” and “paid by insurance” are not the same thing, although collections can be resolved through each of those methods. Only medical collections that are paid by insurance are deleted from your credit reports. And only paid collections, of any variety, are ignored or bypassed by credit scoring models.

VantageScore 4.0, the most current generation of the VantageScore credit score and the first tri-bureau scoring model to consider trended credit data, distinguishes medical collections on your credit reports from other types of non-medical collection accounts (such as credit card, auto loans, and apartment leases) and lessens or minimizes the impact of such collections on a VantageScore credit score relative to the impact of other types of collection accounts.

Any of the aforementioned variable treatment of medical collections is possible because of the requirement by debt collectors to code medical collections as such. This allows credit scoring systems to clearly differentiate medical collections from all other varieties of collection accounts and, thus, treat them as described above.

Checking Your Credit Reports for Collections

If you are unsure if you have medical or any other type of collections on your credit reports, you can check your credit reports with all three of the credit reporting companies at no cost. The credit reporting companies are providing free weekly credit report disclosures through April 2022. You can claim your free credit report disclosures at www.annualcreditreport.com.