Your credit score controls much of how you interact with the financial world around you. When thinking of your credit, you probably think of credit cards or identity fraud or the interest rate on a loan recently taken out. Medical debt has been negatively affecting credit scores for years. It is a well-documented and pervasive issue for people across the country. According to a CFPB report released earlier this year, 20% of US households report having medical debt, with other recent investigations showing the extent of medical and dental debt is far more extensive than previously thought. Eighty-eight billion dollars ($88B) in medical debt was on consumer credit records, accounting for 58% of all collections tradelines as of June 2021. This makes it the largest portion of tradelines in collections, above credit cards and student loans, with the majority of these bills being under $500. But as of July 1, that changed! The three largest nationwide credit reporting agencies (NCRAs) announced they are changing the way medical debt is reported. This should have a positive effect on millions of people’s credit scores, particularly people of color, those in poor health, and people living with disabilities, who disproportionately bear the burden of medical debt. While this is only one aspect of the larger medical debt crisis in the US, this is a good first step to lessening the burden and eventually preventing it altogether.
What is a credit score?
A person’s credit score controls much of how they interact with the economy, but what is it? At the most basic level, a credit score predicts the likelihood of a person’s ability to repay a debt. Scores range from 300 to 850. Per this system, the higher the score, the better. The higher the score, the more likely banks and other players in the economy are to trust that the person will repay a loan. They will be willing to make larger loans at better interest rates. There are five factors that go into a credit score, and they are weighted differently: payment history (35%); amounts owed (30%); length of credit history (15%); types of credit (10%); new credit (10%). Credit scores are used to determine the interest rates for mortgages and car loans. Only medical debt that goes into collection will appear on a person’s credit report. This will contribute negatively to their payment history and credit score, thus impacting their financial health. Due to what we know from the CFPB report and other research about the disproportionate distribution of medical debt on Black and Hispanic households, this has an equally large impact on their financial health.
How does medical debt affect a person’s financial health?
We know medical debt can have adverse effects on a person’s mental and physical health, as well as their financial health. Medical debt can result in seizure of property, wage garnishments, and an increased likelihood of filing bankruptcy. According to a JAMA study, in 2020, 17.8% of credit records in a national credit panel had one medical debt in collections. Medical debt negatively affects a credit score, but according to CFPB’s research, it is less predictive of future credit performance than nonmedical collection. Medical debt is unlike many other debts because it does not come from a decision to buy, but from a need to get health or dental care. Due to complicated financial aid policies and inadequate screenings, confusing insurance claims processes, and inaccurate bills, it is common to have incorrect data on a credit report, and it is extremely difficult to fix. Then, even after debts are repaid or fraudulent bills are forgiven, it remains on a person’s credit report and continues to affect their score. According to the CFPB complaint form, “attempts for debts not owed” has been the most frequent complaint about medical debt.
What are the credit reporting agencies doing?
In March, the three main nationwide credit reporting agencies – Equifax, Experian and TransUnion – released a statement announcing a change in the way medical debt will be reported on credit reports. This announcement came shortly after the CFPB said it would be examining whether it is appropriate for medical debt to appear on people’s credit reports at all. As of July 1, 2022, all paid medical debt will be removed from credit reports. The time period that it will take for a medical debt to be placed onto a credit report will also increase from 6 months to a full year after the initial invoice. Then in the first half of 2023, all medical bills less than $500 will be removed and no longer reported on credit reports.
Some newer, but less widely used models, weigh medical debt less than the NCRAs, and can result in as much as a 25-point increase in score. While there are not yet reports of exact outcomes from this action by the NCRAs, they expect that these changes will remove nearly 70% of medical debt from credit reports, positively affecting millions of scores.
What else can I do?
Keep an eye on your credit report and score. If you or someone you know has a medical debt on their report that you think should no longer be there, reach out to the credit reporting companies and file a dispute. For more information, the CFPB has a site of resources you can refer to and created this infographic on how to handle medical bills. If you or anyone you know feel that a medical collection account has been inappropriately reported, you can submit a complaint to the CFPB here.
Community Catalyst is hosting a webinar on July 28 (register here) about this change and why race equity and health justice advocates should care.