Medical Debt to be Eliminated by Credit Agencies

Three of the country’s largest credit reporting agencies are removing nearly 70% of medical debt from consumer credit reports, the companies announced in a joint statement Friday. Equifax, Experian and TransUnion will eliminate billions of dollars from the accounts of consumers who faced unexpected medical bills that they were unable to pay. The three firms said they made the move after months of research. “Medical collections debt often arises from unforeseen medical circumstances. These changes are another step we’re taking together to help people across the United States focus on their financial and personal well-being,” the companies said in a joint statement.

Medical debt can be volatile and unpredictable, and can negatively affect many financially secure consumers. Black, Hispanic, young and low-income consumers are most likely to be impacted by medical debt, the bureau said.

The announcement follows research from the Consumer Financial Protection Bureau showing that Americans had racked up $88 billion in medical debt on consumer credit records as of June 2021. Medical debt the most common debt collection credit account on credit records, the CFPB said.

Medical debt concerns have heightened since the Covid-19 pandemic hospitalized millions of people, and CFBP Director Rohit Chopra has been publicly critical of medical debt collections by credit reporting agencies. On March 1, Chopra said the CFPD will be “closely scrutinizing” the Big Three credit reporting agencies.

“We expect them to take seriously their role as major actors in the credit reporting system — a system whose integrity and accuracy can determine the financial futures of hundreds of millions of people,” Chopra said. Starting July 1, paid medical collection debt will no longer be included on consumer credit reports. Millions of Americans had credit scores previously lowered because debts paid after being sent to collections could appear on credit reports for up to seven years.

More changes are expected. It will now take one year before unpaid medical collection debt appears on a consumer’s report, instead of six months, the previous standard. The three companies also said that starting in the first half of 2023, medical collection debt less than $500 will no longer be included on credit reports.

Having these debts on credit reports can make it difficult for consumers to rent or buy a home or even get a job. And eliminating this debt from credit reports could boost consumers’ credit scores, helping them get better deals on loans and lower interest rates on products like credit cards.

That said, removing the debt from credit reports is “the continuation of an ongoing trend,” says Ted Rossman, senior industry analyst at Bankrate. Credit scoring models like VantageScore and FICO have disregarded paid medical collections for the past few years and placed a lower emphasis on unpaid medical debt relative to other unpaid bills. But eliminating the debt from reports completely should still boost scores.

Rossman says the bureaus may view medical debt differently than other consumer debt, because consumers often don’t have a say in the medical debt they accrue, as opposed to choosing to take out an auto loan or use a credit card.

“There seems to be an acknowledgement that medical care is essential and should not be penalized by the credit bureaus,” says Rossman. “We might be talking an expensive, life-or-death situation.”

The credit-reporting firms have been speaking with banks to get their take on removing medical debts, according to people familiar with the matter. Banks worry that removing certain debts can make some loan applicants look less risky than they actually are, which could result in unexpected defaults and losses. Yet banks are in the business of lending money, and they don’t want to turn away customers if they don’t have to.

Banks today draw on a wealth of data, including information drawn from customers’ bank accounts, to make lending decisions. They are relying less on traditional metrics, such as credit scores derived primarily from the information on peoples’ credit reports.

Unpaid medical bills were addressed in settlements the three firms reached with state attorneys general dating back to 2015. The companies are now required to wait about six months before adding medical debt to consumers’ credit reports, and they must remove debts that were paid by insurance companies.

The credit-reporting firms have removed a swath of negative information from collections firms in recent years, including unpaid library fines, traffic tickets and gym memberships. In 2017, the companies decided to begin removing tax-lien and civil-judgment data.