White House's proposal could wipe medical debt off credit reports
Debt forgiveness has been one of the hallmarks of Joe Biden’s first three years as president, and the White House's recent proposal might scrub some of that debt away from Americans’ credit reports.
The proposal would forbid credit reporting agencies from including unpaid medical bills on consumers' credit reports, meaning having any amount of healthcare debt would not adversely affect their credit health.
“No one in this country should have to go into debt to get the quality health care they need,” said Vice President Kamala Harris in a joint press conference with Rohit Copra, head of the Consumer Financial Protection Bureau (CFPB).
“These measures will improve the credit scores of millions of Americans so that they will better be able to invest in the future.”
The reason for the move: Medical debts are not something anyone willingly enters into, but become a necessity when someone is very sick, badly injured, or is diagnosed with a disease.
This contrasts significantly with people applying for credit cards or taking out loans for homes, cars, or small businesses then being unable to repay them or simply choosing not to.
“This is an important milestone in our collective efforts and will provide immediate relief to people that have unfairly had their credit impacted simply because they got sick,” Community Catalyst executive director Emily Stewart told NPR.
Burden of medical bills
Medical debt, not credit card debt, is the most common form of debt that winds up in collections. According to the CFPB, 58% of third-party debt collection that appears on credit reports for individuals is for medical bills.
Errors on bills are also a common occurrence, with patients having to dispute with hospitals via their insurance companies, while the erroneous outstanding balance remains on their account.
“These bills, even ones where the patient doesn’t owe anything further, can end up being reported on the patient’s credit report,” said Chopra in an interview with CNBC. “Millions of people have spent millions of hours disputing these errors, often while dealing with serious illness.”
Current state of medical debt on credit reports
At present, big credit reporting services like TransUnion and Equifax include any medical debts that are greater than $500 on a person’s credit report.
Meanwhile, VantageScore, which came on the scene in 2006, has already stopped using medical bills as part of its methodology for determining how creditworthy a person is.
A 2022 study showed that about 100 million people have medical debt, with 12% having $10,000 or more. In the summer of 2022, Equifax, Experian, and TransUnion announced that medical debt that had been paid off after going to collections would be removed from consumers’ reports.
They also announced a plan to allow 12 months, up from 6 months currently, to pay off medical debt before it begins appearing on a credit report.
The flip side of the coin
While the plan is good for consumers struggling to get approved for loans, hospitals and doctors’ offices are less enthused.
“It is unfortunate that the CFPB and the White House are not considering the hosts of consequences that will result if medical providers are singled out in their billing compared to other professions or industries,” said ACA International CEO Scott Purcell in a prepared statement.
Letting consumers with unpaid medical bills know of the possible impact on their credit scores has long been a strategy of collection agencies working on behalf of hospitals and doctors’ offices.
Taking that away could significantly reduce the effectiveness of the collection process.
Purcell warned that this could cause hospitals and doctors’ offices to demand payment for services upfront, knowing they are unlikely to get paid after the fact. This could lead to more people being denied service if they are unable or unwilling to pay for treatment in advance.