This Credit Score Change Could Work to Your Benefit

A woman with a cast on her leg looks at a medical bill

Image source: Getty Images

It’s good news all around for consumers.

Key points

  • Medical debt has the potential to damage consumer credit scores.
  • One change should give consumers some relief in that regard.
  • VantageScore will soon no longer include medical debt when calculating credit scores.

It’s an unfortunate thing that medical bills are a huge driver of debt for consumers. Even people who have health insurance often find themselves unable to keep up with the costs involved. What’s even more unfortunate is that medical bills could have a negative impact on your credit score — that is, when they go unpaid.

If you don’t pay your medical bills, your healthcare provider might choose to turn that matter over to a debt collections agency. And at that point, you risk having your unpaid debts show up as delinquent on your credit report.

Now the good news is that as of July 1, 2022, there’s a required one-year waiting period before unpaid medical debt is allowed to show up on your credit report. This change was put into place largely to give consumers more time to appeal rejected insurance company claims before having their debt show up as delinquent.

Also, as of July 2022, credit bureaus must remove all paid medical debts from consumer credit reports. That’s a big deal, because normally, debts in collections can take seven years to drop off your credit report, even once they’re paid in full.

But still, if you’re unable to pay a medical bill and it remains unpaid for a long enough period of time, it could cause credit score damage. And if your score takes a hit, it could make it difficult to qualify for a loan or credit card the next time you need or want one.

But there’s a new change you should know about regarding medical debt and credit scores. And it’s a change that could work to your benefit.

A helpful new rule to protect consumers

As a consumer, you don’t just have a single credit score. Rather, there are different scoring models that can be used to calculate that number.

FICO is generally the most common, but many lenders rely on VantageScore as well. And as of the end of January 2023, VantageScore will no longer include medical debt, whether paid or unpaid, in its 3.0 and 4.0 scoring calculations at all. So if you’re delinquent on a medical bill either due to a lack of funds or due to an ongoing battle with your health insurance company, you won’t have to worry about your VantageScore taking a hit.

A positive development

Medical debt is a problem for many consumers — especially these days, given that many people are more cash-strapped due to inflation. It’s good to see that changes are being made to help ensure that consumers who get stuck with burdensome medical bills won’t necessarily see their credit scores take a beating.

At the same time, it’s important to do what you can to avoid medical debt, because while the above change applies to VantageScore, many lenders rely on FICO as their go-to scoring model. One way to avoid medical debt, aside from boosting your savings account balance, is to take advantage of tax-advantaged accounts that let you set money aside for medical bills. These include a health savings account for high-deductible insurance plans and flexible spending accounts for those whose insurance plans have lower deductibles.

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