Examining your medical collection

How Do Medical Collections Affect Your Credit?

Have you ever been billed for medical issues and didn’t have the means to pay the bill at the time, causing the bill to go into collections? Situations like these are common and could cause a domino effect of problems.

It’s important to understand how medical collections can impact your credit, but first, we need to identify what a medical collection is.

A medical collection occurs when you are billed for medical expenses and have failed to make a payment on time. It’s difficult to predict exactly how many points any collection or derogatory information will lower you score, but we do know it has a negative impact. 

My name is April Gomez, and I am a Nationally Certified Credit Counselor with Pelican! I’ve complied a list of the questions that I am asked the most when it comes to how your credit is affected by medical collections.

I’ll begin by saying the result is not ideal, but like most situations, it’s nothing you can’t overcome.

How long do medical collections affect your score, and why do they affect it for that long? 

Collections remain on the credit report for seven years from the date of last activity. So as long as they are reporting, they have a negative impact on the credit score.

The impact on the score is mostly felt within two years after the date of last activity. It lessens as time goes on.

Why are you required to pay off collections before a major purchase? 

A mortgage loan would be the only purchase that may require you to pay off a collection. Depending on the type of mortgage you qualify for, some won’t allow you to have any collections or charge offs in order to qualify.

Typically, government backed loans like FHA, VA, and RD require that collections be paid off before the mortgage is booked. They want to be extra certain that they won’t develop into a lien that could be placed on the property in the future.

If you receive a medical bill from a doctor or hospital, make sure you make plans to pay for it. If you don’t have the means to pay it in full, contact that doctor or hospital and make payment arrangements; many arrangements are accepted and welcomed. In most cases, if you send in your monthly payments as agreed, your account is rarely turned over to collections. They prefer to work with you before sending the debt to collections! 

Also, if you agree to a settlement, there are a couple of things to remember. If your debt is “released,” you will receive a tax form from the creditor. The amount that was “unpaid” is counted as income on your taxes, so you will have to claim it.

Does a “total delete” negatively affect your score? In what ways? 

No. If an account is totally deleted, the score no longer recognizes that this account even existed.

This means that the actual collection is removed from the credit report. It will no longer be reported on and therefore won’t affect the score.

Although the collection agency is not obligated to remove a collection, we’ve seen where they are willing to do a total delete to the account if it’s paid as agreed.

Does a settlement affect your credit score and potential future credit options?

No. It shows a zero balance and may have a narrative underneath the tradeline stating that a settlement was accepted, but it has no impact on the score.

While it’s true that the score is not impacted, future lenders could read the narrative and may not lend to you if they fear you won’t pay them back in full. It’s usually not an issue, but I think it’s good for people to know.

How do you find the contact information for a collection agency?

In order to see medical collections, you would need to pull a copy of your credit report from www.annualcreditreport.com.* It will list the collection agency and the original doctor/hospital. It’s important to pay the collection agency and not the original doctor/hospital or creditor.

What does the acronym DLA stand for and what is it? 

DLA stands for date of last activity. This is the date that determines when a collection or negative account will purge from the credit report.

The date of last activity is also the last date that the item was reported as being active to the credit bureau.

Can you take out a loan to help pay collections?

You can, but I wouldn’t always advise it. If you get a loan, you will end up paying interest on top of what you already owe! My advice would be to try and make settlements with the collection agencies.

Taking out a loan, on the other hand, could be advisable depending on the situation. In some cases, it’s better to pay off the debt without paying additional interest. However, if the debt is still accruing a high rate of interest, a lower-rate consolidation loan may help. Or, if someone is in an emergency housing need, paying off a large collection will help them purchase their home more quickly. Every situation is different.

Can you get approved for other loans while you have collections on your report? 

Yes. The only loan that may require you to pay off a collection would be a mortgage loan, but again, a collection is a negative and is hurting the credit score regardless.

Where do you go from here? What are your suggestions for a path forward and building your financial life back up? 

If you have collections reporting, you should contact the collection agencies and try work out settlements. Ask if the agencies would remove the collections as a one-time courtesy. While they are not obligated, some are willing to do so.

We would also encourage anyone in situations like these to meet with a credit counselor to get more help and guidance and create a plan for success.

Do you have any numbers and stats for medical debt? How much medical debt do people have on average? 

A study that was published by Health Affairs in 2018 found that one in six Americans have past-due medical collections on their credit report. Around 53% amount to less than $600 each.

Do you have any further questions about how your credit score can be affected by medical collections that we didn’t cover? Let us know in the comments below!

* Pelican State CU membership required to take advantage of free credit counseling services. Visit pelicanstatecu.com/join to become a member. You have the right to a free credit report from AnnualCreditReport.com or 877-322-8228, the ONLY authorized source under federal law. Credit counseling is not intended to give you financial advice, but the financial education you need to make informed decisions. Results may vary. Pelican and its employees are not responsible for any claim, suit, action or damage resulting from credit counseling.