Myth No. 4: To clean up my credit, I need to pay off medical collection accounts.

The truth: Go ahead and pay those medical collection accounts if you owe them, but don't expect dramatic changes to your credit scores. The fact is, collection accounts hurt your credit scores, and that's generally true whether they are paid or unpaid, though some models may favor collection accounts that have been satisfied. "Collection accounts of lower than $250, or ones that have been settled, have less impact on a consumer's VantageScore," says Richardson. And the most recent FICO scoring model ignores collection accounts where the original balance is less than $100. Notably, most mortgage lenders use an older FICO model when evaluating applications for home loans.

Mark Rukavina, the executive director of the Access Project, asks, "What do you get when you combine a dysfunctional insurance billing system with these flawed scoring algorithms? The answer (could be) $5,000 to $6,000 in additional fees for a home mortgage!"

Eventually all collections are removed from credit reports. Under federal law, they may not be reported after seven years and 180 days from the date the consumer first fell behind on the original bill, regardless of whether the account has been paid or settled.

Is there any benefit to paying off a medical collection account, then? Potentially, yes. You may avoid a potential lawsuit over the debt. If you lose, the creditor will get a judgment against you, and that judgment will add a new negative item to your credit reports.

Is relief in sight?

U.S. Sen. Jeff Merkley, D-Ore., has reintroduced the Medical Debt Responsibility Act, which will prohibit consumer credit agencies from using paid-off or settled medical debt collections in assessing a consumer's creditworthiness. In addition, the bill will require the creditor or credit rating agency to expunge the medical debt from the consumer's record within 45 days from the day it is paid off or settled. The bill is co-sponsored by Sens. Richard Durbin, D.-Ill, Sherrod Brown, D-Ohio; Chuck Schumer, D-N.Y.; Tom Harkin, D-Iowa; and Bob Menendez, D-N.J.

Groups as diverse as Consumers Union and ACA International (the Association of Credit and Collection Professionals) support the bill.

"Consumers do not choose medical bills for illness or accidents or medical billing errors, but these small bills can end up on their credit reports and can financially devastate them at absolutely no fault of their own," says Rodney Anderson, the executive director of Supreme Lending, author of the book "Credit 911" and a champion of the Medical Debt Responsibility Act.

"Imagine a billing error ruins your opportunity to buy your home," he said. "It's not like another bill. If we don't pay our mortgage on time, we pay with a late fee. But with medical bills we often don't hear about them (until they are in collections), because the insurance companies are still in dispute with the medical provider."

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The Access Project's Rukavina insists the system needs to change, "Someone who has a 780 credit score is not a deadbeat, but they could be seriously affected by a single unpaid medical bill," he said. "This cries out for Congress to pass the Medical Debt Responsibility Act as soon as possible."

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