Contributed by Maine Credit Unions
“Credit” is the ability to borrow money to access goods or services, with the understanding that the borrower will repay the loan at an agreed-upon time, or according to an agreed-upon schedule. Credit unions, banks, and other lenders issue credit to people. But before someone is granted credit, lenders determine the borrower’s “creditworthiness,” or how likely they are to pay the money back on time, and in full. Creditworthiness is represented by a credit score, which is a number between 300 and 850. The higher the score, the better one’s creditworthiness. The lower one’s credit score, the less likely financial institutions are to issue a loan – or if they do give a loan, it may be granted with a high interest rate.
Low credit scores make getting a job or renting an apartment harder, since employers and landlords often review credit scores to determine whether or not a person appears to be trustworthy with money. Generally, unpaid bills of any kind are sent to “collections” after the original lender decides the borrower is unlikely to pay back the debt. The time it takes for debt to be sent to collections varies, but six months is a general guideline. After a debt has gone to collections, the borrower’s credit score will be negatively impacted – for up to seven years.
Sometimes people with previously good credit become unable to pay bills resulting from a medical emergency. Until now, this would negatively impact their credit scores. But a recent change is going to help people. Beginning in July, medical debt – if it has been paid off – will no longer be included on credit reports from the three largest credit bureaus, Equifax, Experian, or TransUnion. Historically, medical debt remained on people’s credit reports for up to seven years – even if the debt was paid off. However, with this change, as soon as medical debt is paid, the delinquency will be immediately removed from credit reports.
Also starting in July, people with unpaid medical debt won’t have their delinquencies added to their credit report right away – they will have a year after the debt is sent to collections. This will give people more time to pay off the debt before it influences their credit score. If it’s still unpaid after a year, it will be reported. However, it can be removed after payment.
Another change is forthcoming for 2023. New medical debt under $500 won’t be added to credit reports at all – regardless of whether or not it goes to collections. In a joint statement, the CEOs of Equifax, Experian, and TransUnion said, “Medical collections debt often arises from unforeseen medical circumstances. These changes are another step we’re taking together to help people across the U.S. focus on their financial and personal well-being. As an industry, we remain committed to helping drive fair and affordable access to credit for all consumers.”
These changes will lessen the burden of medical debt, but won’t eliminate it. So people should try to build up an emergency fund to pay for unexpected expenses, including unforeseen medical bills. A good rule of thumb is to save three to six months’ worth of expenses. However, if people can’t afford that much, they should still save away whatever they can. Any amount helps, and can make the difference in maintaining a positive credit standing, even in the case of an unexpected medical emergency.