Erasure of medical debt from credit reports lifting scores: study

(NewsNation) — Medical debt is being erased from consumers’ credit reports in a change that could already be improving Americans’ lives, according to a new analysis from the nonprofit Urban Institute.

Major credit bureaus made the change last year, announcing in July 2022 they would stop reporting unpaid medical collections until the debts were one year old, as opposed to the previous six-month grace period. A month later, VantageScore said it would stop including medical debts in its score calculations.

At the time, Vantage predicted the change could boost credit scores by as much as 20 points.

An analysis from the Urban Institute shows an even higher increase.

From August 2022 to August 2023, consumers with medical debt saw their average score increase from 585 to 615 points, a 30-point jump. It moved them from the subprime level (under 600) to the near prime level (between 601 and 660).

Breno Braga, an economist at the Urban Institute and a co-author of the study, told KFF Health News: “This is a very significant change. It affects a lot of people.”

In total, about 27 million saw an improvement in their scores, according to the Urban Institute.

Credit bureau data from the Urban Institute shows that in August 2023, 5% of consumers had medical debt collections on their credit files, down from 11.6% in August 2022, one month after the reporting changes took effect.

Credit scores are important because they are used by lenders to gauge a consumer’s ability to repay debts. A higher score can result in better loan repayment terms, as well as lower interest rates and insurance premiums, according to NerdWallet.

Low scores can also threaten access to housing and fuel homelessness, as reported by KFF Health News.

The federal Consumer Protection Bureau recently began a rulemaking process to remove all remaining medical debt from credit reports. The agency also found in 2014 that medical debt does not accurately predict a borrower’s creditworthiness.

Opponents of the credit reporting changes say it could negatively force doctors to require upfront payments or drive patients to use credit cards more often, KFF Health News reported.

In fact, a California dermatologist sued the three largest credit reporting agencies, arguing the new changes are illegal and could cost physicians billions of dollars nationwide because patients would be less incentivized to pay their bills. The case is pending in federal court.

The removal of the unpaid collection from credit reports doesn’t mean the debts have been eliminated. The Urban Institute notes that hospitals, other providers and collection agencies can still sue patients to collect on the debts.

“Reducing the burden of medical debt and its wide-ranging consequences would likely require health insurance reforms that build on the Affordable Care Act to further protect consumers from out-of-pocket medical expenses they can’t afford,” the study authors wrote.

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