Biden calls for banning medical debt from credit reports
The Biden administration has proposed a sweeping rule that would ban medical debt from credit reports.
Right now, medical debt affects an estimated 15 million Americans—dragging down their ratings and causing "serious financial repercussions."
According to the White House, the policy could lead to a 20-point bump in credit scores and 22,000 more mortgage approvals each year.
But while this may help ensure outstanding bills don't affect lending decisions, this won't wipe the slate clean for people who are heavily in debt.
Figures from the Survey of Income and Program Participation estimate that U.S. consumers collectively owe $220 billion after medical procedures.
About three million Americans have more than $10,000 in bills outstanding.
According to the Consumer Financial Protection Bureau, which worked on the new proposals alongside Vice President Kamala Harris, $88 billion of this is currently in collections, affecting one in five Americans.
Inaccurate reports damage credit scores
A wider concern is that medical bills are often full of errors, with these inaccuracies then flowing through into credit reports.
The bureau's director, Rohit Chopra, said, "The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe."
"Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans."
It's believed that, if approved, the removal of medical debt from credit reports would also benefit lenders by increasing the number of safe home loan approvals.
This is the latest step in efforts to reduce the impact that healthcare bills have on consumer ratings, with the credit referencing industry also making voluntary changes.
Back in 2022, three of the biggest credit referencing agencies—Equifax, Experian and TransUnion—confirmed they would start removing medical debt from the reports they provide to lenders.
Meanwhile, FICO and VantageScore have made changes that mean such bills have less of an influence on a consumer's reputation.
A step toward medical debt cancellation?
According to the CFPB, lenders would still be able to consider a consumer's medical information if it is relevant to the application they're making.
However, if finalized, this proposed rule would prevent lenders from accepting medical devices like wheelchairs and prosthetic limbs as collateral for a loan.
It'd also stop them from being repossessed if someone falls behind on repayments.
In the meantime, some states are using surplus funds from the $1.9 trillion Covid stimulus package to cancel medical debt for almost three million Americans.
So far, a total of $7 billion has been allocated to medical debt relief, with 1.8 million people in Arizona, Illinois, New Jersey, and Connecticut being the biggest beneficiaries.