Credit companies will remove stains from repaid medical debts

Equifax, Experian and TransUnion — the giant credit-reporting companies that each maintain records on about 200 million Americans — said Friday they would soon eliminate credit stains created by certain medical debts.

The changes – including the removal of black marks for people who settled a debt after it was collected – were applauded by consumer advocates and reflected a growing acceptance that such debts are not the best predictor of financial behavior of a consumer.

The companies said the changes would eliminate up to 70% of medical debt accounts on consumer credit reports, which contain tons of data used to calculate the all-important three-digit credit score that is key to mortgages. , auto loans, lease agreements and more.

Starting July 1, medical debts that have been paid after they have been collected will no longer appear on consumer credit reports, where they can currently linger for up to seven years.

New unpaid medical debt will now only appear after a full year of being sent to collections – instead of the current six months. This will give people more time to settle their debt with their insurance companies 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 helping foster fair and affordable access to credit for all consumers,” the companies’ chief executives 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 debt. But the older scoring models are still widely available, so consumers haven’t necessarily taken advantage of them.

And the three companies’ changes go a step further — for example, they will erase more unpaid medical debt — while reducing negative information entering the calculations of lenders who haven’t adopted the latest formulas.

“It’s huge, there’s no doubt about it,” said Chi Chi Wu, an attorney at the National Consumer Law Center, “and it helps people who have medical debt due to things like co-pays and deductibles, which are usually under $500.”

But the changes will do little to improve the scores of people with the biggest outstanding debts, who often struggle 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 make up the 30%,” Ms Wu added, referring to the portion of unpaid medical debt accounts that will remain on credit reports.

FICO, the most widely used credit score, built in changes to skip payments debts and weigh certain unpaid medical bills less heavily from 2014 with its FICO 9 formula. It found that ignoring collection accounts – medical or otherwise – that had been paid would actually improve the accuracy of its score, he therefore eliminated them entirely.

He also found that people with unpaid medical collections were less at risk than those with other types of unpaid collections, so he considered that information as well. But people with unpaid accounts (including medical ones) were always riskier than those with none at all, so it didn’t go so far as to eliminate medical debt entirely from its algorithm.

VantageScore, FICO’s main competitor, made similar changes to its formula even earlier. He eliminated all collections paid, 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 credit reporting companies to quantify how the changes might change scores — and how many people would be affected. He said he thought the changes would have a similar effect to when 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 spotless credit report and wiped out a medical bill — paid or unpaid — that could boost their score by more than 25 points, he added. (FICO scores range from 300 to 850, the higher the better.)

“The cleaner the file is after removing this negative information, the higher this score may increase,” Dornhelm said.

The bureaus’ announcements came just weeks after the Consumer Financial Protection Bureau said it would review credit companies’ treatment of medical debt and consider an outright ban on including medical debt in credit reports. The agency said its research suggested about 43 million people had medical bills on their credit reports in June, totaling about $88 billion. Fifty-eight percent of collection debts appearing on credit reports were related to medical bills, the bureau estimated.

Medical debts are often difficult to solve given the country’s byzantine insurance system and confusing billing practices. Sometimes consumers aren’t even aware that unpaid bills are lurking on their credit reports until they apply for a loan and their rating is lower than they expected.

Regulators have already targeted medical debt on credit reports. Seven years ago, the credit bureaus reached an agreement with the New York State Attorney General (and later with dozens of other attorneys general) to overhaul their approach to correcting errors and handling them. medical debts. Under this agreement, the companies established the six-month waiting period before declaring an overdue medical debt on consumer records; he also removed medical debts from reports after they were paid by insurance.