The Shocking Cost of Medical Collection Accounts On Your Credit Reports

Can a $30 medical collection account really cost you thousands of dollars on your next mortgage? Absolutely, says mortgage broker Rodney Anderson, who has seen it happen with his clients and has the research to prove it. I recently interviewed Anderson on Talk Credit Radio about the problems with medical collection accounts, and the legislative solution he’s been working on. Here is an edited excerpt from that interview.

[Credit Check Tool: Try Credit.com’s Free Credit Report Card]

Gerri: Rodney, tell me what’s going on with your efforts on the issue of medical collection accounts.

Rodney: The Medical Debt Responsibility Act came about, actually, about 4 years ago when (a bill was first) introduced in the U.S. House of Representatives. People who were buying or refinancing homes would have perfect credit all except a medical collection. Maybe it’s for $17, $100 or $200. It would be dropping their credit scores. I saw one drop 121 points.

Gerri: That (can mean) a lot of money on a mortgage.

[Related Story: How Much is Your FICO Score Costing You on Your Mortgage?]

Rodney: Fannie Mae and Freddie Mac raised the minimum credit standards (applicants need) in order to get the best interest rate on January 1st of 2008 from 620 to 680. Then 90 days later, they raised it from 680 to 720. Then 120 days later, they raised it from 720 to 740. So now in order to get the best rate, for example, with 20% down, you have to have a 740 credit score.

So I did a research study of 5,100 people that have applied for a loan with me for a 10-month period of time, and we found that 2,200 of them – regular everyday common people – had at least one medical collection lowering their credit scores. So that’s how all this came about.

Gerri:  (When it comes to) medical billing, they make mistakes a lot. It’s not an unusual thing.

Rodney: You’re right. According to the American Medical Association, over 20% of claim forms have errors on them. In fact, about a year ago, CNBC was interviewing the CEO of (a large insurance company) and the question came out – how many medical claims do you process a year? And he said, 440 million. And the interviewer said, how many of them have errors on them? And he said, 3%. So the interviewer said, are you kidding me? 13.2 million Americans are affected by medical errors? And that was just (that one insurer) alone.

[Related Story: Reader Stops Mysterious Medical Bill From Damaging Her Credit]

Gerri:  I hear from people who thinks that there’s something different about medical bills. My husband, who should know better, asked me this very question. Do medical collection accounts end up on your credit reports? And the answer is,”yes!” And they hurt you just like any other collection account.

Rodney: Basically, people say, okay I didn’t know about it, I’m willing to pay it but it stays on my credit for seven years. So what the Medical Debt Responsibility Act does, is when you pay or settle a medical collection under $2,500 and rather than waiting 7 years (for it to be removed from your credit reports), it is permanently removed within 45 days.

[Featured Products: Compare credit score, report, and monitoring plans at Credit.com]

Gerri: So who can possibly be opposed to this legislation?

Rodney: Well, we have bipartisan support by both Democrats and Republicans in the US House. But here’s what basically happens: Some people have ideological approaches that say the government shouldn’t be involved in making business decisions.

Image: José Goulão, via Flickr

Gerri:  What do you think the prospects are for this (legislation), Rodney? And anyone who’s listening and has dealt with medical bills, what can they do?

Rodney:  Go to my website and look up the Medical Debt Responsibility Act and contact your local Congressman, your US Congressman and your US Senate office and call them all. And the reason being is, we have big momentum behind the bill.

[Related Story: Four Medical Bill Myths That Can Cost You Dearly]

Let me give you an example of (why this is important). Let’s say you and your husband have a mortgage on your home. If you pay your payment on time, you’re rewarded with good credit. And if you make a late payment, you’re penalized with bad credit. The problem with medical (bills) is, these items are never reported if you pay on time. They’re only reported and sent to the collection agency for negative credit. And a lot of times, insurance companies are still fighting with medical providers and then it ends up on your credit and it costs you a lot more money when it comes to borrowing money.

Gerri:  Under the current system, if a medical bill goes to collections and is reported, even if you pay it, that does not improve your credit scores. A paid collection account is just as serious as another collection account. So I imagine you have clients that come in and say, I’ll pay it, let’s clean it up and they don’t realize there is nothing they can do.

[Featured Products: Compare credit score, report, and monitoring plans at Credit.com]

Rodney: Yes, most people. And they are willing to pay it and I’m not talking about people that just don’t pay their bills on time. People that have managed their credit (well for) a long time. One lady said it best, “I didn’t realize when my son got sick my credit was going to get sick with it.” So many people are penalized unfairly.

Gerri:  This is nothing to be embarrassed about. It can happen to anyone. You go in for surgery, you get the the bill from the anesthesiologist and the hospital but you never get the bill from the laboratory that did the lab test and you don’t know (about it) until it’s in collections.

Rodney: I saw one the other day Gerri, the gentleman made $1.3 million and he had a $30 medical collection on his credit report. It dropped his score 85 points and he had to pay a fee to get his mortgage of $4,200. Yes, you would think that somebody that makes $1.3 million dollars wouldn’t (fail to) pay a $30 bill when all their other credit was absolutely perfect.

Listen to or download the podcast of the full 12-minute interview here.

[Credit Check Tool: Try Credit.com’s Free Credit Report Card]