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The effect of medical debt on a credit score

Medical debt is a big problem for many Kentucky residents who are hoping to raise their credit scores. In fact, almost half of all collection accounts that are listed on credit reports are for unpaid medical bills. The Federal Reserve reported that one out of every six credit reports in the U.S. contains at least one unpaid medical bill that has gone into collections.

Once a medical bill goes into collections, it can become much more difficult for the debtor to secure low-interest loans. When the debtor had a higher credit score to begin with, the damage that can be done to their credit score by a medical collection account will be greater. At worst, one collection item could potentially lower a person's credit score by 100 points.

Many people disagree with the practice of including medical collections on a person's credit score in order to predict future credit risk. Although taking out a car loan or a credit card is a calculated decision, medical debt is often accumulated suddenly during catastrophic events. To offset some of the credit damage from medical collections, FICO introduced a new policy in 2014 by which it has changed the way that some medical debt is scored.

A person who is faced with unexpected and overwhelming medical debt may decide to file for Chapter 7 bankruptcy. This could result in these types of unsecured debts being discharged. Someone who is considering filing for bankruptcy because of this issue might want to speak with an attorney. Legal counsel can point out the eligibility and other requirements associated with a bankruptcy filing as part of an exploration of available debt relief alternatives.

Source: Bankrate, "How will unpaid medical bills hurt credit?", Janna Herron, Oct. 15, 2013

Source: Nerdwallet, "New FICO Score Model Could Boost Credit for Millions -- Medical Bills in Focus", Lindsay Konsko, Aug. 8, 2014

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