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As some medical debts disappear from Americans' credit reports, their credit scores are improving. 2024-04-17 05:13:02

According to an analysis published on Thursday by the non-profit organization Urban Institute, the percentage of American consumers with medical debt on their credit reports has sharply declined in the past year as major credit rating agencies removed small unpaid bills and debts that were less than a year old.

At the same time, millions of Americans have seen their credit scores improve, making it easier for many to find jobs, rent apartments, or buy cars.

"This is a very significant change," said Breno Braga, an economist at the Urban Institute and co-author of the study. "It affects many people."

For many years, medical debt has led to lower credit scores, undermining the financial security of tens of millions of patients and their families.

Under mounting pressure from patient advocates and regulatory authorities, the three major credit rating agencies have taken steps over the past two years to exclude certain medical debts from credit reports, including unpaid medical bills under $500.

It appears that these changes have had an impact. According to the Urban Institute's analysis, as of August, only 5% of adults with a credit report had medical debt on their report, compared to nearly 14% two years earlier.

Researchers also found that for Americans who had medical debt on their credit reports in August 2022, their VantageScore credit rating improved over the next year, rising from an average of 585 to an average of 615.

This has moved many consumers out of the subprime lending category. Subprime borrowers typically pay higher interest rates on loans and credit cards, if they can obtain credit at all.

Improvements in consumer credit scores do not mean that medical debts have been eliminated. Hospitals, collectors, and other healthcare providers continue to pursue patients for unpaid bills, and many still take legal action against patients, place liens on their homes, or sell their debts.

However, changes in credit reporting seem to be mitigating some of the most damaging consequences of medical debt.

For example, a lowered credit score due to medical debt can threaten people's access to housing and contribute to increased homelessness.

According to the researchers at the Urban Institute, approximately 27 million people have experienced significant improvements in their credit scores. VantageScore, which uses a different methodology than FICO, stopped using any medical debt for scoring purposes in January.

Changes in credit reporting have faced criticism from debt collectors and some healthcare providers who warn that hospitals and doctors may demand upfront payments from patients before providing care or push more patients towards credit cards and other forms of credit.

In August, a California dermatologist filed a lawsuit against the three major consumer credit rating agencies, claiming that because there would be less medical debt on credit reports, patients would have less incentive to pay their bills, potentially costing doctors across the country potentially billions of dollars. The case is pending in federal court.

But most leading consumer and patient advocates welcome stricter credit reporting rules. Another study conducted by the Consumer Financial Protection Bureau (CFPB) found that medical debt, unlike other types of debt, does not accurately predict a consumer's creditworthiness, raising questions about how useful it is for credit reporting.

In September, the Biden administration announced plans to make broader changes that would exclude all medical debts from consumer credit ratings. Federal rules to implement such a ban will be developed by the CFPB next year, federal officials said.

This will expand current state efforts. In June, Colorado enacted pioneering legislation that prohibits including medical debt in the credit reports of residents or considering it in their credit scores. A similar measure was passed by the New York State Legislature this year and is awaiting the governor's approval.

Researchers at the Urban Institute predict that this policy will continue to improve consumer credit ratings, although they caution that more systemic changes will be needed to reduce medical debt, which burdens approximately 100 million people in the United States.

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