Most medical debt will soon disappear from credit reports
The nation’s leading credit reporting companies will soon remove about 70% of medical collection debt from Americans’ credit reports.
Why is this important: Medical debt is the most common source of collection-related black marks on credit reports. This can lower people’s credit scores, making it harder or more expensive to get mortgages, car loans, and other types of credit, and even harder to get a job.
- According to the Consumer Financial Protection Bureau (CFPB), the problem also disproportionately impacts blacks and Hispanics, as well as all young adults and low-income people.
What’s new: The three major credit reporting agencies, Equifax, Experian and TransUnion, have outlined three reporting changes that are expected to eliminate more than $60 billion in debt from existing reports.
- First, all paid medical collection debts will no longer be included in reports starting July 1.
- Additionally, people will have 12 months, up from six, to pay medical bills before unpaid collection debt shows up on reports.
- The third change, scheduled for the first half of 2023, will eliminate reporting of all medical collection debts under $500.
The third change is notable, because most medical collections on credit reports are low dollar accounts. Data from a recent national sampling for the CFPB showed a median medical collection amount of $310 in 2020, with 62% of collections under $490.
The backstory: The agencies pointed to the COVID-19 pandemic and the prevalence of medical collection debt on credit reports as catalysts for change, and said they would help people “focus on their personal well-being and their recovery”.
- But they also came under pressure from the CFPB, which focused on inaccurate credit reports and medical debts in particular, under the direction of Rohit Chopra.
The big picture: Medical debt collections are considered less predictive of future payment problems than other debt collections because people rarely choose to incur them. (You agree to pay off a loan before you pick up the keys to a new car, but you don’t necessarily expect to owe a medical bill).
- According to the Kaiser Family Foundation, two-thirds of medical debt is the result of a one-time or short-term medical expense resulting from an acute medical need.
- Some newer credit models used by reporting agencies already take this into account, but some widely used models do not, particularly older FICO models required for federally backed mortgages, notes analyst Ted Rossman. principal of the sector at Bankrate.
What they say : “Medical collection debt often stems from unforeseen medical circumstances. These changes are another step we are taking together to help people across the United States focus on their financial and personal well-being,” the CEOs said. rating agencies in today’s release.