Too many Americans have bad credit because of unpaid medical bills. That's not likely to change any time soon, despite two reforms in how those bills will be reported to the credit bureaus.
Starting Sept. 15:
• There will be a 180-day waiting period before unpaid medical debts can show up on people's credit reports.
• Medical collections will be deleted from credit reports if they're paid by health insurers.
Credit bureaus Equifax, Experian and TransUnion agreed to the new standards as part of two settlements with state attorneys general in 2015. The changes in medical debt reporting were designed to help people whose bills fell through the cracks between their health care providers and their insurance companies, says Chi Chi Wu, a staff attorney for the National Consumer Law Center.
What the changes won't do is help people who simply can't afford to pay their bills or who got fed up with waiting for their insurers and paid the bills themselves.
The stakes are high. A single collection on a credit report, paid or unpaid, can drop a 680 FICO score by 40 points and a 780 score by 100 points. (The most widely used credit scoring formulas, such as the FICO 8, use a 300-to-850 range.)
Lower credit scores can:
• Make credit harder to get and more expensive.
• Raise auto and homeowners insurance premiums.
• Increase deposits required for utilities.
• Make renting an apartment difficult.
WHOM WILL THE CHANGES HELP?
About 43 million Americans have medical collections on their credit reports, according to the Consumer Financial Protection Bureau. That's one in five U.S. adults who have credit reports.
But fewer than 8 percent of those collections are listed as paid. The fraction of those that were paid by insurers and thus now eligible to be removed from credit reports is unknown. However, it's clear that deleting insurance-paid collections won't benefit the vast majority of people who have medical collections.
Likewise, the waiting-period change will help only a few, according to an analysis by FICO, the leading credit scoring company. Its data scientists found that only about 200,000 people, or less than 0.1 percent of the 220 million people with a credit report, will be helped by the six-month reporting delay.
"This isn't going to have a substantial impact," says Ethan Dornhelm, vice president for score and analytics at FICO.
That's because the waiting period just codifies what's already common practice. Medical providers may hire collectors to contact patients when bills are as little as one day overdue, but the debts typically aren't reported to the credit bureaus until at least 180 days have passed since the default, says Rick Gundling, senior vice president at the Healthcare Financial Management Association, a trade group.
A SHIFT IN PERCEPTION OF MEDICAL DEBT
The effect of medical debts on credit scores has been a hot topic in recent years as Americans have struggled with the rising cost of health care. The CFPB, consumer advocates and some lawmakers argued that medical bills are fundamentally different from other collections and shouldn't have the same impact on people's scores.
Ultimately, FICO and rival VantageScore agreed. The most recent versions of their scores, FICO 9 and VantageScore 3.0, treat medical collections less harshly and ignore all paid collections. The problem is that those latest versions of the credit scoring formulas aren't yet in widespread use and there's no predicting when they will be.
Until they are, medical collections will continue to devastate millions of people's scores. Even those who expect to benefit from the credit bureau changes need to be diligent, the consumer law center's Wu says. After Oct. 1, when the changes are expected to be complete, consumers should check their credit reports and dispute any paid medical collection that should have been dropped. The dispute process can take 30 days or more.
"You don't want to be in a position where you're checking right before you get a mortgage or you get a car," Wu says. "You need time to deal with it."
This column was provided to The Associated Press by the personal finance website NerdWallet.
Liz Weston is a columnist at NerdWallet, a certified financial planner and author of "Your Credit Score." Email: firstname.lastname@example.org. Twitter: @lizweston.