Major credit score provider will no longer count medical debt

One of the two major credit score providers is set to wipe medical debts from its most recent scoring models to help those most financially vulnerable improve their credit scores.

VantageScore expects to remove medical collection data — regardless of amount owed or age of collection — from its two most recent score iterations, VantageScore 3.0 and 4.0, by mid-October.

The move could increase some Americans’ credit scores by as much as 20 points, the company said.

“Across our credit scoring models, medical collections accounts have minimal impact on the predictiveness of creditworthiness for a large segment of the population. As such, we are making the proactive decision to remove the information from our models entirely,” Silvio Tavares, president and CEO of VantageScore, said in a news release. “Our decision reflects VantageScore’s continued effort to offer the most predictive scoring models and to help increase financial inclusion.”

The decision builds on moves recently announced by credit bureaus Equifax, Experian and TransUnion to remove paid medical debt from 70% of consumers' credit reports and follows a series of reports this year from the Consumer Financial Protection Bureau (CFPB) showing the negative implications of medical debts on credit reports.

One in every five consumers had outstanding medical bills in collections, according to research from the CFPB. The consumer watchdog also found that medical collections were less predictive of future repayment risk than other collections or payment history on loans. That helped to prompt the main credit bureaus to reassess if medical debts should be included in credit reports.

"We’ve known all along that medical debt doesn’t predict credit default,” Mike Litt, consumer campaign director for U.S PIRG Education Fund, told Yahoo Money. “Because so many health issues are beyond our control, medically necessary debt shouldn’t be reported or considered at all.”

The largest credit score developer, FICO, has also taken steps to reduce the impact of medical debt on its newer credit score models.

“FICO has recognized for years the need to treat low balance and unpaid third-party medical collections in a more sophisticated manner, reflected in FICO Score 8, which launched in 2009, and in newer FICO Score models,” Sally Taylor, vice president and general manager of FICO Scores, told Yahoo Money.

For instance, its FICO Score 9 was further refined when it came to considering medical debt, and its FICO Score 10 suite bypasses all paid third-party collections — both medical and non-medical. Additionally, FICO Score 8 through 10 bypass third-party collections where the original balance was below $100. And FICO Score 9 and 10 also differentiate between unpaid medical collections and unpaid non-medical collections.

“This differentiated approach often results in unpaid medical collections having a less negative impact on the FICO score than unpaid non-medical collections,” Taylor said.

While these changes from VantageScore will help some folks, the three national credit bureaus will continue to collect some of this data. Residents of lower income, majority Black or Hispanic groups are likely to have medical collections on their credit reports that aren’t paid, the CFPB reported.

"Consumers will be able to open doors shut on them by lenders using VantageScore credit scores which were unfairly impacted by medical debt,” Litt said. “Now it's time for the three national credit bureaus to stop reporting medically necessary debt altogether, to ensure such debt won't impact any credit score used in the market.”

Clarification: This article has been updated to clarify that the three national credit bureaus will still collect some data related to medical debt.

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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