money Here’s why your credit score may now be higher
Many Americans may get a higher credit score this month after the removal of 70% of medical debt from credit reports nationwide.
As of July, the nation’s largest credit reporting agencies — Equifax, Experian, and TransUnion — stopped including paid medical collection debt on credit reports.
They also are extending the period before unpaid medical collection debt appears on a consumer’s credit report from six months to one year. And starting next year, medical collection debt under $500 will no longer appear on credit reports.
The changes come after two years of the ongoing COVID-19 pandemic and industry research that showed the prevalence of medical debt plaguing consumers’ credit reports. The move, first announced in March, could also boost some folks' credit scores by 100 points and help them get better terms on credit cards, loans, and insurance.
“It reflects the fact that medical debt is different from other debt,” Bankrate Senior Industry Analyst Ted Rossman told Yahoo Money. “It's usually not something that you willingly signed up for, and it's not the same as a monthly mortgage or credit card bill or car loan.”
The move to eliminate medical debts from consumers’ credit reports follows an analysis from the Consumer Financial Protection Bureau that called the nature of the medical billing system in the U.S. “complicated and burdensome.”
The consumer watchdog said the lack of pricing transparency in the system left families at an increased risk of reduced access to credit, falling into bankruptcy, and avoidance of medical care as they unsuccessfully tried to sort out bills.
The problem was widespread.
As of June, more than 43 million Americans owed an estimated $88 billion in medical debt, but that number could be significantly higher since not all medical debts in collections are reported to the credit bureaus, the CFPB found.
“Was it even your responsibility? Maybe it was a mix-up with insurance,” said Rossman, who noted that the credit reporting agencies now have better ways of calculating payment patterns and creditworthiness.
“There's new stuff starting to come on credit reports like buy-now-pay-later, and streaming services, and cell phone plans in some instances,” he said. “And the feeling is that those may actually be more representative.”
Credit scores could increase by more than 100 points, for some
For decades, inaccurate medical bills have often hurt the most vulnerable and uninsured.
Black and Hispanic Americans were more likely than other racial and ethnic groups to have past-due medical payments. Approximately 28% of Black and 22% of Hispanic individuals were behind on medical debts, followed by 17% of white and 10% of Asians, according to the CFPB.
The Kaiser Family Foundation revealed that medical debt cut across age groups, with young adults and low-income individuals — including veterans and older adults — most heavily affected by debt. Approximately 3 million Americans owe over $10,000 in medical debt, and 16 million owe at least $1,000.
As the credit reporting agencies remove paid medical debt in collections — which until recently remained on credit reports for as long as seven years — it could lift a person’s credit score by more than 100 points in some cases, according to Rossman.
“That 100-point increase won't apply as much if you have a bunch of other delinquencies or if you have a ton of debt,” Rossman said. But “if medical debt was an isolated instance that was dragging down your score, this removal could be huge.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.
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