Medical debt is an albatross hung around the necks of Americans—but some relief is on the way. Over the weekend, three of the country’s major credit reporting agencies announced they would soon remove most medical debt from their calculation of credit reports, along with other reforms. The decision was preceded by a recent report from the Consumer Financial Protection Bureau that questioned the value of medical debt as a predictor for credit trustworthiness, along with the accuracy of reporting by debt collection agencies.
As first reported Friday by the Wall Street Journal and later confirmed by the companies themselves, Equifax, Experian, and TransUnion will be removing paid medical collection debt from their collective credit score reports by July 2022—about 70% of the medical debt currently tallied in these reports. They will also extend the grace period from six months to a year before unpaid medical debt can end up in a credit report. And come the first half of 2023, they will no longer include any medical debt under $500 on their reports. The net result will likely improve the credit reports of millions of Americans.
In early March, the Consumer Financial Protection Bureau issued a lengthy report looking at medical debt. It found that there was around $88 billion in medical debt listed on consumer credit records as of July 2021 (an underestimate of total medical debt, since not all of it is recorded by collection agencies). That year, medical debt represented 58% of all third-party debt collection tradelines, making it the most common form of debt on these reports. At the same time, the vast majority of individual debts owed were under $500, though some people may have had multiple debts. Past-due debts on a credit report, even if eventually paid, can lower a person’s credit score, making it harder to get a job or secure loans for a business or home purchase.
While credit reports are intended as a barometer for whether someone can be relied on to repay their loans, the CFPB criticized the value of medical debt reporting. Because medical debts are often caused by an emergency and unexpected health situation, they’re “less predictive of future payment problems than other debt collections are,” the CFPB noted. Some newer models of credit reporting do take this into account, but many widely used models still don’t, the agency added. These outdated models are then more likely to negatively impact Black and Hispanic Americans, younger people, older Americans, and veterans, who are disproportionately affected by medical debt. Uninsured people and those who use out-of-network care, sometimes without even knowing, are more likely to have higher amounts of debt.
Collection agencies routinely make people’s lives a nightmare through litigation that can leave their wages garnished or have them sent to jail, the CFPB report found. And sometimes, the report went on to note, debt collection agencies flagrantly report bad information, leaving people’s credit scores affected by debt they no longer owe or never owed—errors that can take years to correct. People with debt or who are simply afraid to accumulate it will also be more likely to avoid seeing the doctor in the future. All of these issues likely worsened during the pandemic, especially once most private insurers stopped waiving cost-sharing for covid-19 treatment by last summer.
In its conclusion to the report, the CFPB warned it would “act to ensure that the consumer credit reporting system is not used coercively against patients and their families in order to force them to pay questionable medical bills.” And in an earlier report this January, the CFPB argued that Equifax, Experian, and TransUnion had not done enough to address customers’ complaints about inaccurate credit reporting, to the point of violating the Fair Credit Reporting Act.
The decision by the big three to remove most medical debt from their ledgers was widely praised by consumer advocates as well as President Joe Biden, though only as a first step. (Some politicians such as Bernie Sanders has called for the abolition of all medical debt and other substantial reforms moving forward.) “This is a step in the right direction, thanks to CFPB. We’ll keep fighting for consumers - from increasing transparency to preventing surprise billing and more,” Biden wrote on Twitter in response to the announcements.
Correction: A previous version of this article misattributed a tweet to Bernie Sanders; it was actually from President Joe Biden. I will now run into the sea.