The three major credit reporting bureaus – TransUnion, Experian, and Equifax – have all agreed to stop including certain types of medical debt, including some medical loans, on credit reports after they’re paid off. But what does this mean for your credit score? Here’s what you need to know.
How your credit score is calculated
Your credit score is a numerical rating that reflects your creditworthiness and is used by lenders, government agencies, and even some employers to gauge how responsible you are with money.
Your score is typically calculated by using the following criteria:
- The number of on-time payments: This reflects your ability to manage your finances responsibly and is the most significant factor affecting your credit score. Lenders and creditors look at your track record of meeting debt obligations on time.
- Your credit utilization ratio: This measures how much of your available credit you’re using. It’s calculated by dividing your total credit card debt by your total available credit.
- Your average age of credit: The older your average age of credit, the better. Creditors want to see you’ve had a long-term relationship managing your debt effectively.
- The mix of credit: The types of accounts you have. The best scores have a range of credit cards and loans. However, don’t worry if you only have credit cards, as this number only accounts for 10% of your score.
- The number of hard inquiries: The amount of times you’ve applied for new credit within the past three years. The more inquiries, the more creditors will be concerned that you’re in a bad financial situation and are scrambling for help.
The importance of having good credit
In the U.S., a good credit score is essential for obtaining loans, mortgages, and other forms of credit. A high credit score means you’re a low-risk borrower, which could mean getting approved for a loan with a competitive interest rate even if you have low income or no collateral, saving you thousands over someone with a lower score.
How medical debt previously impacted your credit score
Before this decision, any outstanding medical debt was shown on your credit report and could have a significant impact on your score. Medical debt is one of the toughest debts to get rid of in the U.S., as many end up in collections because it is a long-term commitment that can be nearly impossible to pay off. This can lead to a bad credit score that may be hard to improve.
Any medical loans or debt that were paid off stayed on credit reports for seven years, which meant any lender receiving your loan or credit application would get a glimpse into both your financial and, in a way, medical history.
What new changes are happening with medical debt
- Effective now, the three credit bureaus have decided to remove all paid-off medical debts from credit reports, removing the previous seven-year rule.
- In addition, no medical debt will be posted on a credit report for up to a year once it goes into collections.
- In 2023, any debts (medical or otherwise) under $500 will not be included in your credit report
The bottom line
While the decision by the three credit bureaus to remove paid-off medical debts from credit reports is a big step in the right direction, it’s essential to keep in mind that any unpaid debt, no matter how small, can still have a significant impact on your score. If you’re struggling to pay off medical debt, working with a financial counselor could be a great way to improve your overall credit health and get back on track.