DebtHammer’s newsletter breaks down the key financial developments that you need to know.
70% of medical debt in collections to drop from credit reports
If you haven’t already heard, the three major credit reporting agencies – Experian, Equifax, and TransUnion – have recently joined efforts to change their policy on medical collections debt reporting.
Starting July 1st of this year, nearly 70% of all medical debt in collections will be wiped from consumers’ credit reports. Not only that, but any new unpaid medical debts won’t show up on your credit report for 12 months instead of 6.
This does more than just give you more time to catch up on payments or work out a payment plan with your healthcare provider. It also significantly relieves the financial burden for millions of Americans.
For more good news, starting in 2023, the three reporting agencies will no longer report any medical collections debt if it’s under $500.
A recent study by the Kaiser Family Foundation (KFF), a nonprofit research organization that focuses on national and global health issues, found that around 23 million Americans owe at least $250 in medical debt. This is despite the fact that more than 90% of the population has some kind of health insurance – either public or private.
Around half of the surveyed group reported owing at least $2,000 in medical bills. And approximately 1% reported medical bills of at least $10,000. Most of this debt comes from high deductibles and ongoing healthcare needs.
Unfortunately, nobody is immune to medical debt. Even more unfortunate is the fact that a single unpaid medical bill in collections could damage a person’s credit score by up to 100 points. The higher the credit score, the more significant the drop.
That means, even if you had stellar credit in all other areas, you could suddenly be facing higher interest rates, unfavorable loan terms, and more difficulty securing financing. You could also be looking at higher deductibles or deposits elsewhere. But with this new policy, once an account is removed from collections, your credit score could increase significantly.
While there are ways to keep on top of medical debt, such as by setting up a payment plan with the hospital or insurance company, this isn’t always enough. Even if you make your payments on time, some medical debt could still end up in collections.
Plus, medical billing errors are a real problem. According to the American Medical Association, around 7.1% of all paid claims contain some type of error. Other studies have put this number at a rate that’s closer to 80%, though.
Some of these mistakes are small – like a misspelled name. Others are due to things like duplicate charges or incorrect balances owed.
Many consumers don’t have the time to fix these errors before they end up damaging their credit score. Once this new policy takes effect, people will have more time to resolve these errors and negotiate with their insurance companies to pay their accounts.
So, why the sudden change?
Well, according to the credit bureaus’ CEOs, it’s because “medical collection debt often arises from unforeseen medical circumstances” and people should not be punished for something that happened years ago. With these new changes, more consumers should be able to get back on the path to financial wellness and personal wellbeing.
Cash advance apps and payday loans
If you need quick cash, you might think a payday loan is your best bet. They’re easy to qualify for and usually only require some form of identification, an active checking account, and proof of income. Plus, funds are distributed either immediately or within a couple of days.
While this might sound great, the problem comes with the short repayment terms and high APRs. Most payday loans are due within two weeks or on your next payday and have an average APR of nearly 400%. Due to these astronomical fees, most borrowers end up having to take out at least one more payday loan to pay off the first.
Before turning to these predatory loans, consider getting a cash advance app instead. With one, you can take out a small sum – usually a few hundred dollars or less – from your upcoming paycheck ahead of time. This early access can help in emergency situations or when a bill is due before you get paid.
Some cash advance apps have a small monthly or service fee, while others are free with a tipping option. Since you’re using your own money, they don’t come with interest.
Of course, neither cash advance apps nor payday loans are long-term options. If you find yourself regularly strapped for cash, consider taking on a side gig or ask for more hours at your current job. And, if you don’t already have a personal budget, make one that’ll help keep your finances on track.
Buy now, pay later plans
Buy now, pay later plans work very similar to installment loans. You can pay a portion of your purchase at checkout and set the rest up in monthly payments with one.
Here’s an example of how a BNPL plan might look.
Let’s say you want to buy a television for $400 using a buy now, pay later plan. At checkout, you can fill out an application, pay $100, and go home with your purchase. Two weeks later, however, you’ll be charged another $100. In another two weeks, you’ll have to pay the next $100 and so on until you’ve paid off the entire balance.
There are some advantages to using a buy now, pay later plan. For one, these plans can help if you absolutely must buy something now — such as a replacement appliance. For another, they usually have either no or very little interest, which makes them more affordable than most short-term loans.
However, some people use these plans as they would a credit card. That is, they make purchases they can’t afford or think they have more spending money than they actually do.
The bottom line
Having up to 70% of all medical collections debt cleared away can help out a lot of people who need it. And, with the extended reporting period and the bureaus’ recent decision to stop reporting on medical debts below $500, it should be more feasible to build credit.
Meanwhile, if you’re looking for ways to fund small purchases now, a buy now, pay later plan or cash advance app could be an option. Just don’t rely on these short-term options for too long.
Focus on budgeting your finances instead. That way, you can pay down debt or avoid getting into a sticky situation in the first place. If you need help organizing your finances, consider using a budgeting app. These apps make budgeting so much easier and cut down on financial stress.
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Coming next month
Check out next month’s newsletter to learn more about student loan debt and free budgeting apps.