New Rules Clear Credit Issues from Medical Debt for Millions
Medical debt has constituted most of the debt in collections on consumer credit reports for the past decade, lowering consumers’ credit scores and limiting their access to loans and other credit. But recent actions by major credit bureaus made significant changes in reporting medical debt in collections. In July 2022, the credit bureaus removed paid medical collections from credit reports and stopped reporting unpaid medical collections until those debts were one year old, as opposed to the previous six-month grace period. In August 2022, it was announced that medical debt in collections would no longer be used in calculating Vantage scores, one of the country’s most used credit scoring models. A new report from the Urban Institute finds that those changes have resulted in major credit improvements for millions of Americans, particularly those who already have financial challenges. Breno Braga, one of the authors of the report, spoke with Spotlight recently; the transcript has been lightly edited for length and clarity.
Why don’t we star with some background on what’s been happening with medical debt?
Over the past two years, the three major credit bureau agencies decided to implement significant changes in the reporting of medical debt. In July 2022, the credit bureaus decided to erase debt that was less than a year old from consumers records and also erased paid medical debt. So, if you had medical debt in the past and you paid it, that would disappear from your records as well. Then in August 2022, it was announced that medical debt collections will no longer be used in the calculation of Vantage scores, which are one of the most used credit scoring models. And then finally, in April of this year, medical debt that is under $500 will no longer appear on consumer credit reports as well. So basically, any unpaid medical bill that you have that is less than $500 will no longer show up in your credit reports any more.
And continuing with some general background, medical debt has become a huge problem on credit reports, correct?
Medical debt, before all those changes were implemented, was the most common type of unpaid debt that someone would have reported in their credit file—more common than unpaid auto loans, unpaid credit cards, unpaid mortgages. And that’s important because having an unpaid debt in your credit report can affect a lot in your life, as your credit score is measured to try to summarize your credit history and it’s used by loan providers to decide to give you a loan or not and also the cost of that loan.
But in addition to that, we know that potential employers and potential landlords can also check a consumer’s credit file before making a job offer or making a rental leasing agreement. So, it’s potentially the case that if you apply to a job and your potential employer can see that you have a big bill of medical debt, they might be less likely to offer you a job in the same way a potential landlord might be less likely to accept you.
It’s also important to point out that medical debt almost always comes from unexpected expenses, such as an unplanned visit to an emergency room. Let’s say if you are thinking about buying a car and you think like, oh, I’m going to need an auto loan, that’s an instance where you think deeply about your finances and make a decision. Medical debt usually is not like that at all. You have a health emergency, and you don’t ask the price beforehand. You just end up with this bill later that was not planned. A lot of times, medical debt reflects the problems that people have navigating the healthcare system. You get a bill and people have a lot of difficulties trying to understand the system and often don’t understand what they are supposed to pay as opposed to their insurance. I think medical debt is a very different type of debt and I think that’s what led to these big changes.
And can the credit bureaus unilaterally make these changes, or does it have to be mandated by Congress or the administration?
My understanding is that they did it unilaterally because they were facing this potential policy change coming from the Consumer Financial Protection Bureau that would push for the removal of all medical debt from file.
So, now let’s talk about what your study found. I’m guessing that the Urban Institute has been looking at this data for a while.
Yes. We have data on 4% of all consumers in the country that have a credit file going back all the way to 2010. And we have been tracking the share of consumers with medical debt for a while now. One interesting thing we found is that during the pandemic, you already saw a drop in the share of consumers with medical debt in the country for several different reasons. One of them is that people avoided going to the doctor. But with these new changes, you see a much steeper drop—our estimation is that 15 million consumers had all their medical debt collections erased from their credit files in the past year.
We also follow people over time and look to see the impact that has on their credit scores. For people who had medical debt in their credit files in 2022, when we look at their credit score now, it improved considerably—on average, they went from 585 points to 615 points. To give you like an idea of what that means is that for those folks that had medical debt in August 2022, the average person in that group had a credit score that was subprime. And when you have a subprime credit score, it’s very hard for you to get a credit card, for example, or to get a mortgage or a loan. Dropping medical debt moved many of these consumers to a near-prime level, which makes it much more likely to get accepted for a loan application.
Is there any way of knowing how aware people are of these changes? I mean, let’s say I had applied for a loan and got rejected and am still assuming that I wouldn’t get it, but actually I might now if I had medical debt.
It’s my suspicion that people aren’t really aware of it because people are not checking their credit score constantly. Credit scores are often like this black box that nobody understands. So, that’s one of the reasons why we wrote this.
What are some of the further steps that are being considered? You said in the paper that some states have already gone farther.
At the national level, CFPB has proposed to remove all remaining medical debt from credit reports. But at the state level, this has happened already—Colorado has implemented a law that removed all medical debt from credit reports and New York state has passed the same law, but it’s still not been implemented yet. So, both at the state and national level, things have changed significantly.
And is the medical industry or the hospital industry opposed to these sorts of changes?
It’s important to point out two caveats on everything that has been done. The first one is that medical debt will not disappear totally.
It still has to be paid off.
Yes. And hospital providers can still sue patients and collect unpaid medical bills. They still can do all of that, but they lost a tool that they had in the past to help make consumers pay their debt. There is also some potential for unintended consequences from this. For example, you might think that providers now might increase the efforts to ask for upfront payment, because they know now that it’s going to be harder to collect medical debt later. That’s a potential drawback.
And I guess it also helps in a small way with the whole surprise medical billing issue, which Congress has been trying to slowly chip away at?
That’s goes back to the point that I made earlier that most medical debt that comes to you is not because of a choice you made. And not everybody has the knowledge all the time to fight those bills. We’re educated people with flexible jobs and if somebody’s charging us with a bill that we don’t think we should pay, we can spend our time calling the insurance or calling the provider. Most people don’t have that time.
And finally, how often do you run these numbers? Annually?
Yes, it’s annual. The numbers I gave you were from August this year, so August 2023. We’ll get a new update in August of next year.