Why medical debt is killing your credit score


Stethoscopes hang in the doctor's office of the MUT society for health in Berlin on Sept. 11, 2013. (Britta Pedersen/picture-alliance/dpa/AP)

Anyone who has ever gotten hit with thousands of dollars in medical bills knows how difficult it can be to pay them off on time, and how quickly debt collectors start to swarm.

Even if you eventually repay the bills, that stint in collection could shave points off of your credit score, making it harder for you to buy a car, rent an apartment or even get a job. Unlike other types of debt that people run up, medical debt is typically the result of unpredictable and pricey events — a heart attack, appendicitis or a severed finger. And there are often lapses between when people are billed and insurers pay up. In the meantime, an account could be turned over to a collection agency.

None of these factors are taken into consideration when credit bureaus calculate scores. But the Consumer Financial Protection Bureau thinks they should be, because credit scoring models may underestimate the creditworthiness of people with medical debt in collections.

In a new study, researchers at CFPB looked at the credit histories and scores of 5 million anonymous consumers to examine their payment patterns over a two-year period starting in September 2011. They found that people with medical debt generally pay their bills at the same rate as people with higher scores. People who paid off medical debt that wound up in collections were also more likely to repay all other debt, on par with folks whose credit scores were 16 to 22 points higher.


"This tells us that having a medical debt in collections is less relevant to a consumer’s creditworthiness than having an unpaid cellphone bill or overdue rent," CFPB Director Richard Cordray said on a call with reporters.

What this also tells us is that people could improve their credit scores, maybe by as much as 22 points, if their medical debt were treated differently by credit bureaus.


"These point differences may not matter as much to consumers who have very high credit scores because they may still be able to qualify for loans and the rate they pay may not be affected," Cordray said. "But for consumers with lower scores, these differences can be more significant.  They may cause consumers to be denied a loan altogether or they could cost tens of thousands of dollars over the life of a home mortgage."

Considering that the Centers for Disease Control and Prevention found that one in three Americans have trouble paying their doctor's bills, the credit impact of medical debt is a critical concern for the CFPB. But the bureau has offered no indication of what it plans to do to change things.

The consumer agency has authority over credit bureaus and debt collectors, meaning it can write rules or take legal action against those companies for "unfair" acts.  For now, senior officials at the CFPB say the agency is just trying to inform the debate over how medical debt should be treated.

Consumers' next best bet for fixing the scoring model is Congress. It just so happens that there is a piece of legislation that seeks to remove medical debt from credit reports once the bills are paid. But the Medical Debt Responsibility Act has languished in committee for well over a year. The first time the legislation was introduced in 2010 it cleared the House, but that was a different time and under a different political party.

"Unfortunately, this particular Congress, especially in the House, has not passed that much legislation. Even though the bill had broad support before, the current chair of the House Financial Services Committee — we have no idea whether he would let the bill move forward," said Chi Chi Wu, staff attorney at the National Consumer Law Center.

It's unknown what House Financial Services chairman Jeb Hensarling (R-Tex.) would do, since calls to his office were not immediately returned. Update: Ranking committee member Maxine Waters (D-Calif.) is now calling for a hearing on medical debt and the pending bill.

It is entirely possible that credit rating agencies could take it upon themselves to change the system. VantageScore, the much smaller rival of Fair Isaac Corp (FICO), decided last year to exclude paid collection accounts from its latest credit scoring model because it wasn't predictive of people's ability to pay their bills. And FICO is preparing to launch a new scoring model that reduces the weight of medical collections.

Danielle Douglas-Gabriel covers the economics of education, writing about the financial lives of students from when they take out student debt through their experiences in the job market. Before that, she wrote about the banking industry.

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