How Medical Debt Affects Your Credit Score Now

In July 2022, the credit bureaus made a decision to remove medical debt from changing credit scores.

In a joint statement, credit-scoring competitors Equifax, Experian, and TransUnion announced:

1. Satisfied medical collections will be removed from credit reports immediately
2. Unpaid medical collections will not be recognized until the debt is twelve months old
3. Outstanding medical collections of less than $500 in 2023 and beyond

The change affected 70 percent of all medical debt on credit reports.

23 million Americans carry medical debt, according to Kaiser Family Foundation research. Black and Hispanic adults are most likely to be affected, and two-thirds of medical debt is connected to a one-time or short-term acute illness.

For first-time home buyers, medical debt can be costly. 

Medical debt affects consumer credit scores differently from other debt types such as credit card because medical debt doesn’t show up on credit until it’s late or in collection, which can trigger a massive credit score loss. 

Do Medical Bills Affect Your Credit For Buying a Home?

Mortgage companies enforce minimum credit score standards so, prior to July 2022, having medical debt on your credit report made it harder to buy a home. 

Now, mortgage lenders ignore medical collections as part of a buyer’s mortgage application because medical debt doesn’t predict future mortgage performance as other debt does.

Home buyers with medical debt aren’t less creditworthy. 

As Fannie Mae’s rules state: “Collection accounts reported as medical collections are not used in the [mortgage approval] assessment.” 

Freddie Mac and FHA include similar language in their rule books. In April 2022, via Executive Order, the White House instructed the USDA and VA to ignore medical debts.

Note: Non-government mortgage programs, including jumbo loans and other niche products, may treat medical debt and collections negatively, so check with your lender before proceeding.

How Does Your Credit Score Affect Buying a Home?

Credit scores affect a home buyer’s ability to buy a home and get a mortgage approved.

All mortgage loans enforce a minimum credit score. Buyers must meet the minimum credit score standards to get mortgage approved. 

• Conventional mortgages: 620 credit score minimum
• USDA loans: 620 credit score minimum
• VA loans: 580 credit score minimum
• FHA loans: 500 credit score minimum

Credit scores also affect mortgage rates. Buyers with lower-end scores receive higher rates from lenders, which raises the cost of owning a home.

For some buyers, higher costs can move homeownership out of reach. 

Equifax, Experian, and TransUnion acknowledge that credit scores affect renters who want to become homeowners. Eliminating medical debt and collections from credit reporting is projected to raise credit scores 22 points, on average.

What Impacts Your Credit?

Mortgage credit scores are algorithms that predict the likelihood that a homeowner will miss three consecutive months of payments, which triggers a foreclosure event.

The credit score formula uses five weighted inputs:

1. 35% – How well you pay your bills
2. 30% – How much credit you’re using
3. 15% – What types of credit do you use
4. 10% – How much experience you have with credit accounts
5. 10% – How much additional credit have you sought lately

The mortgage credit score model ranges from 300-850. Buyers with credit scores at the upper end of the range are less likely to default. 

The credit score formula also weights for recency. 

• Credit events from the last six months: Large effect
• Credit events from between 6-12 months ago: Smaller effect
• Credit events from between 12-24 months ago: Smallest effect

Credit events older than two years do not affect mortgage credit scores whatsoever. 

Your credit score, therefore, can be improved with good behavior and time. Many home buyers see sprouts of improvement in 30 days, with significant gains beginning after six months.

You can buy a home with bad credit if needed, but you never have to. 

How to Fix Your Credit Score

Home buyers can improve their credit score by 100 points or more in a six-month period.

Here’s how to fix your credit fast.

1. Make on-time payments

Payment history accounts for more than one-third of a mortgage credit score. 

To boost your score, keep paying your bills on time, and bring your slow-pay accounts current. If money is tight and you can’t account for every delinquent account, start with auto and student loans, then move to credit cards and charge cards. 

Medical debt and medical collections can be ignored if the accounts are less than a year old. 

Do not pay delinquent accounts from more than two years ago.

2. Spread out your credit card debt

Credit utilization is the second-largest component of a credit rating. It accounts for 30 percent of the overall score. Credit utilization measures how much unused credit is available to a consumer.

Credit scoring rewards consumers with large amounts of unused credit.

Consumers can use untapped credit to pay bills during financial emergencies such as job loss, illness, or divorce. “Maxed out” consumers don’t have that option and are more likely to default.

The ideal credit usage is one-third of your credit card borrowing limits. 

Reduce your balances, spread them over multiple cards, and leave your accounts open. Accounts at zero percent utilization can improve your score overall.

3. Don’t open new credit cards or shop for an automobile

The credit score formula uses your prior spending and payment history to establish your rating. It also looks for clues that you’re loading up on new debt.

First-time home buyers who avoid applying for new credit cards, auto loans, and other debt types are likelier to have higher credit scores than buyers who recently started new debt.

The credit agencies view newly opened credit accounts negatively. Don’t apply for credit for a credit card, automobile, or anything else until closing on your home to maintain your highest score possible.

4. Be patient

Credit scores predict the likelihood that a person will make on-time mortgage payments for the next 90 days. The best way to predict the next 90 days is to look at the person’s recent credit past.

Whether you’ve exhibited excellent or lousy credit behavior, the credit score formula assumes that behavior will continue, and your score will reflect it. You can improve your credit score by making minor adjustments and allowing time to pass.

The credit score algorithm is forgiving. It’s never too late to improve.