Consumers will soon see medical debts pulled from their credit reports in a move that will make it easier for people to apply for loans and apartments while raising the risk to banks of losses.
Three major firms (Experion, Equifax, and TransUnion) will strip nearly 70% of medical debts, paid and unpaid, from credit reports starting this summer.
“Medical collections debt often arises from unforeseen medical circumstances. These changes are another step we’re taking together to help people across the United States focus on their financial and personal wellbeing,” the companies’ leaders said in a joint statement Friday.
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The companies, which maintain reports on more than 200 million people, will remove the debts that were paid after being sent to collections accounts starting in July. Even paid medical debts can stay on a credit report for up to seven years, hindering a person’s ability to take out loans and get housing. New debts will not be reflected in credit reports for a year after being sent to collections, while smaller unpaid debts that are less than $500 will be removed in the first half of next year.
The public owns a massive amount of medical debt despite having insurance coverage. The Consumer Financial Protection Bureau, which supervises banks, lenders, and credit reporting firms, determined that 43 million credit reports hold a total of about $88 billion in medical debt.
“When it comes to medical bills, Americans are often caught in a doom loop between their medical provider and insurance company,” said CFPB Director Rohit Chopra. “Our credit reporting system is too often used as a tool to coerce and extort patients into paying medical bills they may not even owe.”
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The threat of being saddled with crippling medical bills has loomed large over the course of the pandemic, during which people have been much more vulnerable to contracting a serious infection.
The three major credit reporting companies are also likely acting to try to stave off regulation from the CFPB, which has said it would take a larger role in holding credit reporting firms accountable for imposing erroneous medical debts, such as surprise medical bills, which are now outlawed per the No Surprises Act enacted in January. The agency is also conducting investigations into the companies’ handling of consumer disputes about credit reporting errors.
Many consumer advocates say that medical debt should be treated differently from other forms of debt because people do not choose to take it on.
Removing the reporting of medical debt, however, raises the risk that banks take when granting loans to people, possibly setting them up for money losses and defaults.
