Many Americans could get a higher credit score this month after 70% of medical debt was removed from credit reports nationwide.
In July, the nation’s largest credit reporting agencies – Equifax, Experian and TransUnion – stopped including paid medical collection debt in credit reports.
They are also extending the period before unpaid medical collection debt appears on a consumer’s credit report from six months to one year. And starting next year, medical collection debts under $500 will no longer appear on credit reports.
The changes come after two years of the ongoing COVID-19 pandemic and industry research that has shown the prevalence of medical debt plaguing consumers’ credit reports. The move, first announced in March, could also boost some people’s credit scores by 100 points and help them get better terms on credit cards, loans and insurance.
“It reflects the fact that medical debt is different from other debt,” Ted Rossman, senior industry analyst at Bankrate, told Yahoo Money. “It’s usually not something you voluntarily took out, and it’s not the same as a monthly mortgage or a credit card bill or a car loan.”
The decision to eliminate medical debt from consumer credit reports follows an analysis by the Consumer Financial Protection Bureau which called the nature of the medical billing system in the United States “complicated and cumbersome”.
The consumer watchdog said the lack of price transparency in the system put families at increased risk of reduced access to credit, bankruptcy and avoidance of medical care as they tried in vain to pay bills.
The problem was widespread.
As of June, more than 43 million Americans owed an estimated $88 billion in medical debt, but that number could be significantly higher because not all medical debt in collection is reported to credit bureaus, the CFPB found.
“Was it even your responsibility? Maybe it was confusion with insurance,” said Rossman, who noted that credit reporting agencies now have better ways to calculate payment habits and creditworthiness.
“There are new things starting to come up on credit reports like buy now-pay later, and streaming services, and cell phone plans in some cases,” he said. “And the feeling is that those may actually be more representative.”
Credit scores could increase by more than 100 points, for some
For decades, inaccurate medical bills have often hurt the most vulnerable and uninsured.
Black and Hispanic Americans were more likely than other racial and ethnic groups to have past due medical payments. According to the CFPB, about 28% of blacks and 22% of Hispanics had overdue medical debt, followed by 17% of whites and 10% of Asians.
The Kaiser Family Foundation found that medical debt crosses age brackets, with young adults and low-income people, including veterans and the elderly, being the hardest hit by debt. About 3 million Americans owe more than $10,000 in medical debt and 16 million owe at least $1,000.
As credit reporting agencies remove paid medical debt in collections – which until recently remained on credit reports for seven years – it could raise a person’s credit score by more than 100 points in some cases, according to Rossman.
“That 100 point increase won’t apply as much if you have a bunch of other outstanding debts or you have a ton of debt,” Rossman said. But “if medical debt was a one-off that lowered your score, that removal could be huge.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.
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