Medical bills are a source of a significant financial issue for millions of people in America. These bills amount to the biggest source of personal debt among Americans. The top three agencies tasked with reporting credit have planned to drop most of the debt, erasing billions of dollars in medical debts from consumers’ credit reports.
So, what does this mean, and what is in it for you?
Escalating Medical Debt
Currently, Experian, Equifax, and TransUnion, the major credit reporting companies countrywide, have announced the significant changes expected in the reporting of medical collection debt. The changes could erase almost 70% of consumers’ medical collection debts reports.
As of the first day of July, these agencies will cease to include medical debt that typically goes to collections on consumers’ credit reports after the debt is paid. The move would remove billions of dollars of debt from consumers’ records.
Additionally, any unpaid medical collection debt will cease to reflect on credit reports for the first year. The previous grace period was typically six months. The extension will give consumers more time to work things out with their health providers and insurers to address their bills.
Further, beginning the first half of 2023, any medical collection debt under $500 will not be included in consumers’ credit reports.
Typically, debt reflected in credit reports, medical or otherwise, can make it difficult for consumers to secure credit, employment, or housing. It may also heighten the risk of bankruptcy, prompting consumers to avoid medical care in the future.
How Will the Changes Affect Consumers’ Credit Score?
While medical isn’t included in your credit report if it stays with your original service provider, it can affect your credit score once it goes to collections. The debts can remain on your credit report for over six years. Under the new rule, these debts will not exist once paid off through the promised medical debt forgiveness.
An entry of collection debt reflected in your credit report may decrease your credit score by 110 points. Lenders use your credit score to determine whether you are eligible for loans and the interest rates on the loans.
Some newer VantageScore and FICO algorithms currently overlook paid medical collections and put a lower emphasis on any unpaid medical debt compared to any other type of debt.
After some poking from the CFPB around the issue, credit bureaus have been persuaded enough to entirely do away with paid medical collections in consumers’ credit reports.
The removal will enable consumers who have paid off medical collection debt to improve their credit scores, especially for older FICO models that are important for accessing federally-backed mortgages.
The record erasure represents an acknowledgment of the importance of medical care and why credit bureaus should not penalize it. Medical debt forgiveness will lessen the debt burden and increase credit scores for many people.
