Sun Sentinel Palm Beach Edition
Most medical debts to come off consumer credit reports
Equifax, Experian and TransUnion — the credit reporting companies that each keep files on roughly 200 million Americans — said they will soon wipe away credit stains created by certain medical debts.
The changes — including removing black marks for people who settled a debt after it went to collections — were cheered by consumer advocates and reflected a growing acceptance that such debts aren’t the best predictor of a consumer’s financial behavior.
The companies said Friday that the changes would eliminate up to 70% of the medical debt accounts on consumers’ credit reports, which contain reams of data used to calculate the important three-digit credit score that is the key to mortgages, car loans, rental agreements and more.
Starting July 1, medical debts that were paid after they went to collections will no longer appear on consumers’ credit reports, where they can currently linger for up to seven years.
New unpaid medical debts will now only appear after a full year of being sent to collections instead of the current six months. That will give people more time to address the debt with their insurance companies and health care providers.
In the first half of 2023, the credit reporting companies said, they will exclude unpaid medical collection debts of less than $500.
“As an industry we remain committed to helping drive fair and affordable access to credit for all consumers,” the companies’ CEOs said in a statement.
The changes mirror some already in action elsewhere: The formulas used to generate credit scores have already been updated to reduce the influence of paid medical debts. But older scoring models are still widely in circulation, so consumers haven’t necessarily reaped the benefits.
And the three companies’ changes do go a bit further — for example, they will expunge more unpaid medical debts — while reducing the negative information flowing into the calculations of lenders that haven’t adopted the latest formulas.
“This is huge,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center, “and it helps those people who have medical debt due to things like copays and deductibles, which is usually under $500.”
But the changes will do little to lift the scores of people with the largest unpaid debts, who are often dealing with catastrophic or costly illnesses that result in high bills even with insurance coverage.
“It is the sickest and poorest, the most vulnerable, who are the 30%,” Wu said, referring to the portion of unpaid medical debt accounts that will remain on credit reports.
FICO, the most widely used credit score, baked in changes to ignore paid debts and to weigh certain unpaid medical collections less heavily starting in 2014 with its FICO 9 formula. It found that ignoring collection accounts — medical or otherwise — that had been paid would actually improve its score’s accuracy, so it eliminated them.
It also found that people with unpaid medical collections were less risky than those with other types of unpaid collections, so it factored that in as well. But people with any unpaid accounts (including medical) were still riskier than those with none at all, so it did not eliminate medical debt from its algorithm.
VantageScore, FICO’s main competitor, 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 was working with the credit reporting companies to quantify how the changes may shift scores and how many people would be affected. He said he believed the changes would have a similar effect as when the reporting companies eliminated two other sources of negative information: tax liens and civil judgments.
Those affected generally saw their scores rise by 20 points or less, he said.