A May 2014 released study by the Consumer Financial
Protection Bureau indicates medical collections are having a negative impact on
credit scores without merit. I couldn’t agree more, medical collections in
general seem to be more about poor billing than consumers unwilling to pay. The
idea of removing them from the credit scoring models has been tossed around
over the years. Perhaps this initiative by the CFPB will get the ball rolling
on that.
In my book The Credit
Road Map, I have an entire section dedicated to medical collections. Most
importantly, steps on how to avoid the issue in the first place. Despite the “thorn
in the side” problem medical collections cause credit scores, there is a deeper
purpose for the reporting.
Let me explain.
A debt becomes delinquent, any debt (justifiably or not). The
debt is sent to collection.
A collection agency reports the collection account to one,
two, or all three credit bureaus (not always all three, it varies, but
generally all three).
The collection account decreases the credit score because there
is risk, something is past due, recent negativity is bad.
A collection account could eventually turn into a judgment,
although I do not see a lot of medical judgments, I see way more credit card
judgments.
A judgment can turn into garnishment of earnings (wages) or
non-earnings (bank account).
This potentially creates instability for the consumer
financially, which could result in the inability to pay bills as normal, hence
higher risk.
So the initially collection is sort of a call-out of, “hey,
we have a problem.”
Although the problem may not really be a problem if we are talking
about a small amount, if forced to pay, it may not disrupt the consumer’s
typical monthly financial ability to pay obligations.
In essence a collection tells anyone looking at the credit
report there is potential for legal liability that may or may not materialize,
because when it comes to bad debts, a collection is the first step before
pursuing a judgment. Not always, but generally.
In all likelihood the consumer will discover they have a
medical collection when they go to finance a house or car. They will be
appalled a bill was never sent to them, a phone call was never made, and no
opportunity was given to pay the bill in the first place. The debt will be paid
quickly, the consumer will move on.
Most of the medical collections I see are for less than
$100, and the next level up is less than $300. I do see massive medical
collections at times on the $10,000+ range. Sadly there is no distinction based
on dollar amount in terms of scoring impact.
I am happy to see the CFPB looking at this issue because it
does impact consumers. One of my students in a presentation I gave at the Ohio
State University was denied an internship because he couldn’t pass a background
check due to his credit. The negative item was a medical debt. You can’t change
the damage once it is done in some cases. I could write numerous case studies
on medical collections alone, it is that out of control. In fact, I am writing
a case study book about various credit scenarios beyond what is in The Credit Road Map. If you would like
to be added to the waiting list to be notified of the release this summer send
me an email at Patrick@PatrickRitchie.com.
Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com
NMLS# 276438 AZ#0913109
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