Equifax, Experian and TransUnion — the giant credit reporting firms that each keep records of about 200 million Americans — said Friday they will soon be wiping out credit blotches caused by certain medical debts.
The changes — including the removal of black spots for people who paid a debt after it went to collections — were welcomed by consumer advocates and reflected a growing acceptance that such debt is not the best predictor of a consumer’s financial behavior.
The companies said the changes would eliminate up to 70 percent of medical debt bills on consumer credit reports, which contain piles of data used to calculate the all-important three-digit credit score that is key to mortgages, auto loans, rental agreements and more.
As of July 1, medical debts paid after going to collection will no longer appear on consumer credit reports, where they can currently hang for up to seven years.
New unpaid medical debts now only appear after a full year of shipping to collections – instead of the current six months. That gives people more time to address the debt with their insurance company and health care providers.
And starting in the first half of 2023, the credit reporting companies said, they will exclude unpaid medical collection debts under $500.
“As an industry, we remain committed to promoting fair and affordable access to credit for all consumers,” the companies’ CEOs said in a statement.
The changes reflect some already in action elsewhere: The formulas used to generate credit scores have already been updated to reduce the impact of medical debt paid. But older scoring models are still widely circulating, so consumers haven’t necessarily reaped the benefits.
And the changes made by the three companies go a little further — they’ll cancel more unpaid medical debts, for example — while reducing the negative information that flows into the calculations from lenders that haven’t adopted the latest formulas.
“This is huge, there’s no question about it,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center, “and it helps those people who have medical debts because of things like deductibles and deductibles, which are usually under $500. ”
But the changes will do little to eliminate the number of people with the greatest unpaid debts, often dealing with catastrophic or costly illnesses that lead to high bills, even with insurance coverage.
“It’s the sickest and the poorest, the most vulnerable, who are the 30 percent,” Ms Wu added, referring to the portion of unpaid medical debt bills that will remain on credit reports.
FICO, the most used credit score, baked into changes to ignore paid debt and certain unpaid medical collections as of 2014 with its FICO 9 formula. It found that ignoring paid collection accounts — medical or otherwise — would improve the accuracy of the score, so it eliminated them entirely.
It also found that people with unpaid medical bills were less risky than people with other types of unpaid bills, so it took that information into account as well. But people with unpaid bills (including medical) were still riskier than people who had none at all, so it didn’t go so far as to eliminate medical debt from the algorithm altogether.
VantageScore, FICO’s main competitor, has made similar changes to its formula before. It eliminated all paid collections, including medical debt, with a scoring model introduced in 2013.
Ethan Dornhelm, FICO’s vice president of scores and predictive analytics, said the company worked with the credit reporting companies to quantify how the changes could shift scores — and how many people will be affected. He said he believed the changes would have a similar effect to when the reporting companies eliminated two other sources of negative information: tax liens and civil judgments. Those affected generally saw their scores increase by 20 points or less, he said.
If a consumer had an otherwise flawless credit report and canceled a medical bill — paid or unpaid — it could raise a score by more than 25 points, he added. (FICO scores range from 300 to 850, the higher the better.)
“The more pristine the file looks after you remove that negative information, the more that score can go up,” said Mr Dornhelm.
The agencies’ announcements came just weeks after the Consumer Financial Protection Bureau said it would investigate credit companies’ treatment of medical debts and consider an outright ban on including medical debts in credit reports. The agency said its research suggested about 43 million people had medical bills on their credit report in June, totaling about $88 billion. Fifty-eight percent of collection debts that appear on credit reports were linked to medical bills, the agency estimates.
Medical debts are often difficult to resolve, given the country’s Byzantine insurance system and confusing billing practices. Sometimes consumers aren’t even aware that unpaid bills are lurking in their credit reports until they apply for a loan and their score is lower than expected.
Regulators have previously targeted medical debt on credit reports. Seven years ago, the credit bureaus reached a settlement with the New York State Attorney General (and later the attorneys general of dozens of others) to rethink their approach to error recovery and their handling of medical debt. Under that agreement, the companies established the six-month waiting period before reporting past due medical debts in consumer files; it also removed medical debts from reports after they were paid by insurance.
