How Much Do Medical Collections Hurt Your Credit Score?

No one, unless they're sporting a major case of Munchausen, wants to find themselves hospitalized. It's just too expensive. Even people with insurance are often responsible for co-pays and co-insurance charges that far exceed what they're able to pay. As a result, it isn't uncommon for medical debt to end up in collections. Roughly 50 million people in the U.S. are currently making payments on some form of medical debt. Many don't succeed--making medical bills the number one cause of bankruptcy in this country.

If you're one of the many Americans living paycheck to paycheck, paying off exorbitant medical bills may not be an option. Ignore your medical debt, however, and it will eventually end up in collections and damage your credit scores. This is the choice that thousands of Americans are faced with: go without necessities in order to make payments on medical debt or let their credit scores take a hit.

How Do Unpaid Medical Bills Affect Your Credit Scores?

If you don't pay off your medical bills, the doctor or hospital you owe will eventually turn your account over to a collection agency. The collection agency's task is to collect as much of the debt as possible. The collection agency keeps a percentage of whatever they collect as payment for their services.

A medical emergency may cost you your good credit.

Hospitals and doctors' offices don't report your debts to the credit bureaus. Even if you set up a payment plan and faithfully adhere to that plan, the payments you make toward your medical bills don't show up on your credit report and help boost your credit scores. As unfair as it sounds, the only impact medical debt can have on your credit report is a negative one. Collection agencies routinely report their accounts to the credit bureaus. Collection accounts are always negative and will significantly damage your credit scores. Paying off the debt doesn't change this. Paid medical collections are just as damaging to your credit rating as unpaid ones.

How Much Medical Collections Hurt Your Credit Scores

The affect any item--positive or negative--has on your credit scores depends on how good or bad your credit is when the item initially appears on your report. The better your scores are when a medical collection appears on your report, the more credit points you'll lose. I'll give you some ballpark figures, but none of this is set in stone. In other words, your mileage may vary.

On average, a collection account of any variety will cost your credit score about 100 points. If you have excellent credit, expect your scores to take a bigger hit. The opposite, of course, is true for those with bad credit. If your credit is already in shambles, you may lose only 50 points--sometimes less. Time also plays a big role in the impact a medical collection has on your scores. The older a collection account is, the less it affects your credit.

How Long Does Medical Debt Stay on Your Credit Report?

Medical collections remain on your credit report for seven years. The original delinquency date generally won't show up on your credit report. What will show up is the date the collection agency first reported your medical debt to the credit bureaus. That date has no impact whatsoever on the date the credit bureaus must remove the item. The date of removal is set in stone regardless of what state you live in or whether or not you've ever made a payment on the debt.

The exception to this rule is if the collection agency sues you and wins a judgment. A judgment will remain on your credit report for either the amount of time that the judgment is enforceable in your state or seven years, whichever period is longer. In addition to giving the collection agency a wider range of debt recovery options, judgments also do significant damage to your credit rating.

Medical Collections Often Carry Less Weight With Lenders

Now for the good news. (Didn't think there was any of that, did you?) Lenders who pull and review your full credit history often place less importance on medical collections than other types of collection accounts. This is because a medical collection on your credit report doesn't scream "I'm financially irresponsible!" like, say, a defaulted credit card. Lenders know that medical emergencies are out of your control. Thus, even though the medical debt shows up on your credit report and hurts your scores, it may not be an obstacle with some lenders.

There are exceptions to this rule as well. If the debt is still within your state's statute of limitations, your lender has the right to turn down your application until you either pay off the debt or the statute of limitations passes. This is nothing more than the lender protecting its own interests. After all, no lender wants to finance an item that can be liened or seized due to an unpaid medical collection.

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Why Paying Off Collections Doesn't Improve Your Credit Score

Debtors are often shocked to learn that paying off collections doesn't improve credit scores. Your credit

report will reflect the payment, but a collection is always a negative entry regardless of how much--if any--of the debt you've paid off. Understanding how the credit scoring system works is crucial to understanding why paid collections are just as bad as unpaid collections.

Credit Scoring and Why Paying Off Collections Doesn't Matter

The FICO scoring system--the most widely used by lenders in this country--exists solely to help lenders evaluate an applicant's level of risk. Can you imagine how much money banks and credit card companies would lose if there was no credit scoring system in place? Every single time they wrote a loan or extended credit to an individual they'd be playing financial Russian roulette. The FICO credit scoring system was born to help lenders maximize profits by lowering risk.

The logic works like this: You wouldn't have a collection on your credit report if you were financially reliable (mistakes happen, this is just the general rationale). A collection indicates that you're having money troubles or are unreliable in general. If either of those assumptions are true, that makes you a much higher risk to new lenders and creditors. In order to provide lenders with the most accurate risk-assessment possible, the FICO credit scoring system docks your credit scores accordingly.

Paying off collections doesn't improve your credit report because collections are always negative. Unlike a credit card or loan account which can be a positive credit entry if you pay your bills on time or a negative credit entry if you don't, a collection account can't swing either way. Once it hits your credit report it deals the maximum amount of damage it can, and paying it off doesn't help you. You could argue that the very act of paying off the collection debt demonstrates responsibility and that your credit scores should increase as a result (and I'd agree with you), but that simply isn't the way the system works.

Credit Scores Improve Over Time Whether You Pay Collections or Not 

Fortunately, this dark cloud of debt collection has a silver lining. Collections don't hurt your credit forever. The FICO credit system takes the age of your credit report entries into account. The more recent an item is, the more relevant it is to your current creditworthiness. As time passes, both good and bad habits can change. This makes the most recent credit entries the most accurate. As such, they carry a greater weight during the scoring process.

This is good news for you if you're trying to rebuild your credit after a collection. Time is your friend. As long as you practice good debt management habits and keep your debt in check, your credit scores will gradually improve in time--whether you pay off the collection agency or whether you don't.

Credit Scores Improve After Collections Are Removed From Your Credit Report 

Once the credit bureaus remove collections from your credit report, you'll generally see a marked increase your credit scores. The FCRA states that collections must be removed seven years from the date the original creditor's debt went delinquent. The delinquency date is usually considered to be the day your original debt went unpaid for 180 days. It doesn't matter how long the collection has been on your report. It's removal rests on the original debt's delinquency. The credit bureaus can remove collections, however, for any of the following reasons:

• The 7-year credit reporting period has expired
• The collection is the result of identity theft
• The consumer successfully disputes the debt's accuracy with the credit bureaus
• The collection agency removes the entry in exchange for payment
• The consumer sues the collection agency for reporting incorrect information and wins 

How Collectors Use the Threat of Credit Damage to Make You Pay

If most consumers realized that paying off collections wouldn't improve their credit scores, many would opt to withhold those payments and put them to better use. Collection agencies are all too familiar with this fact. Because of this, collection letters often note that, if you pay the debt, "your credit report will be updated." This is misleading. The average consumer believes that this means paying the debt will improve his credit rating. In reality, all the collection agency does is update the debt's status to "paid" or "settled." This doesn't improve your credit scores.

Debt collectors also use this angle on the telephone. It isn't uncommon for a debt collector to try to convince a debtor to pay up by using a "but what about your credit?" argument. If the collection agency has already reported the debt to the credit bureaus, the damage is done. The "but what about your credit?" angle deceives the debtor into thinking that paying off the collection will lessen or even undo credit damage that has already occured. This, of course, is untrue.

When Paying Off Collections is a Good Idea

Although paying collections doesn't improve your credit score, your credit report will reflect the fact that you paid the debt. While some lenders see collections as negative no matter what, others will see the fact that you paid the collection as positive evidence that you're making an effort to keep up with your debts and be more financially responsible. Certain mortgage lenders will even require you to pay off collections before approving your mortgage loan. Paying off collection debts also prevents a whole host of negative consequences such as:

• Debt collection lawsuits
• Bank account garnishment
• Wage garnishment
• Civil Judgments
• Property liens
• Asset seizure

This doesn't happen to everyone. Unless the collection agency is working to collect debt on behalf of the government, the agency must sue you and win a judgment before it has the right to utilize more extreme collection methods. 

In the long run, its up to you how to manage your debts in the way you see fit. If that means ignoring collections in order to put food on the table or working overtime to pay your debts in an effort to alleviate your moral compass, so be it. Just remember that whether or not you choose t pay off collections, doing so doesn't improve your credit score. 

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Will Your Mortgage Lender Pull Your Credit a Second Time Before Closing?

It's no secret that your credit plays a big role in whether or not you'll get a mortgage loan approved. What many buyers don't realize, however, is that just because your initial credit check goes well that doesn't mean you're out of the woods credit-wise. Although all mortgage lenders' policies differ, its very likely that your lender will conduct a second credit check before closing.

Why Mortgage Lenders Pull Your Credit a Second Time

Your mortgage lender pulls your credit a second time for the same reason it conducted the original credit check--to ensure that you've A.) remained financially stable and reliable and B.) Not incurred any new debt that would encroach upon your ability to keep up with your new mortgage payments.

I know what you're thinking, "Isn't one credit check enough?" and the answer to that is a resounding NO. People spend long periods of time preparing their credit for that one credit check. They'll tuck away their old bad habits and work tirelessly clearing away credit blemishes in an effort to ensure high scores during the mortgage credit check. For these folks, its a bit like a bride-to-be dieting herself to insanity before her wedding. After the wedding, the pressure is off and her predilection for twinkies and fried chicken comes back with a vengeance. The same is true when it comes to credit. Once that mortgage credit check is out of the way, the pressure to perform is gone and irresponsible people often run right back to their old lets-have-fun-maxing-out-the-credit-card ways.

What Happens If You Take on New Debt Before Closing?

It isn't only irresponsible people who make mistakes between the first credit check for a mortgage and the credit inquiry the lender conducts before closing. Here's a very common scenario:

Joe paid off his wife's car years ago, but the car is starting to have problems that require expensive repairs. Joe wants to buy his wife a new car, but the couple is getting ready to apply for a mortgage loan. Joe knows that the added debt he would take on by purchasing a car would decrease his debt-to-income ratio which would affect his mortgage approval. The new car will have to wait.

Joe and his wife are approved for a $200,000 mortgage. They've chosen at house that costs $195,000. Now that the mortgage credit check is out of the way, Joe buys his wife a new car. The payments are $500 a month. Joe doesn't realize that the mortgage lender will pull his credit a second time before closing. The second credit check reveals Joe's new debt which decreases the amount he's approved for. Joe and his wife have to drop the contract on the $195,000 house they would have had no trouble buying if Joe had simply waited to buy the car.

For most people, the period of time from accepted offer to closing only lasts 30-60 days, so the danger of having credit changes significant enough to derail your mortgage approval is low. If the mortgage process is more complex, such as when you're buying a short sale, the length of time from application to closing can be much longer--making it more likely that recent financial changes will show up on your credit report and affect your pending mortgage loan.

I think its important to note here that, although last-minute credit checks before closing are still common, not every lender uses them. Loans guaranteed through Fannie Mae, for example, haven't required a second credit check for years now. Keep in mind, however, that ultimately the decision on whether to pull your credit again before closing lies with the lender. It's always wiser to behave like that second credit check is coming....just in case.

The moral of the story? Wait until you sign the closing papers and the keys are in your hand before you take on any new debt. Yes, we live in a world of instant gratification, but tread with caution. In these post-recession days, banks are still hesitant to loan money and the last thing you want to do is cheat yourself out of that mortgage you so desperately want by flunking the second credit check.

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How to Dispute and Remove Unauthorized Hard Pulls On Your Credit Report

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Deleting Collections From Credit Reports With the "One-Two" Punch