Some credit scores could gain 100 points after medical debt is dropped from credit reports

The three major credit reporting bureaus are set to wipe the majority of medical debts from consumers’ credit reports in July. That means millions of Americans — including those most financially vulnerable — could see their credit scores substantially improve.

“For some people, it could lift their credit score 100 points or more, somebody who otherwise had really good credit and is dragged down by this one instance of medical debt,” Ted Rossman, senior industry analyst, told Yahoo Finance Live (video above). “And that's really emblematic of what's happening here.”

As of June, more than 43 million Americans owe an estimated $88 billion in medical debt, but that figure is likely higher as not all medical debts in collections are fitted to consumer reporting agencies, according to the Consumer Financial Protection Bureau.

The real problem: Once those bills are sent to collection agencies, people can suffer from long-term repercussions – including risk of bankruptcy, avoidance of medical care, and difficulty securing employment, according to the report. In the second quarter of 2021, 58% of all bills in collections were medical bills.


Fortunately, some Americans can look toward a fresh start and potential improvement in their creditworthiness in the coming months.

“I think the industry is moving more towards credit-like obligations, things like buy-now-pay-later, streaming plans, cell phones,” Rossman said. “Those seem more reflective of credit risk than things like medical debt and traffic tickets.”

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The three major credit reporting bureaus are set to wipe the majority of medical debts from consumers’ credit reports in July. (Photo: Getty Creative) (scyther5 via Getty Images)

Credit agencies to wipe most medical debts from reports

Starting July 1, Experian, Equifax, and TransUnion will remove approximately 70% of medical collection debt tradelines from consumer reports.

“Paid medical collections are going to come off of credit reports starting in July. So that's a really big improvement for a lot of people,” said Rossman. “These are all changes that I think will help a lot of people's credit scores.”

In addition to removing the majority of medical debts from consumers’ reports, unpaid medical debt will take a year – not six months – to show up on a person’s credit report. Finally, in the first half of 2023, medical debts under the amount of $500 will not be recorded, the credit bureaus said.

The move to eliminate medical debts from consumers’ credit reports follows a CFPB analysis that called medical billing and collection practices “concerning” because a lack of transparency in the system often left families trapped in a “doom loop between provider and insurance companies” as they tried to sort out bills to no avail.

“Even when a patient tries to battle to get an accurate bill or an insurance claim paid, medical debt collectors have a weapon that is hard to fight against: the credit report,” Rohit Chopra, director of the CFPB, said in a statement. “I am concerned that the credit reporting system is being weaponized as a tool of coercion to get people to pay medical bills they may not even owe.”

About two dozen people eventually filled the
About two dozen people eventually filled the "Debt and Collections" courtroom in Poplar Bluff, Missouri. Many of the cases on the docket involved medical debt. (Credit: Michael S. Williamson,The Washington Post via Getty Images) (The Washington Post via Getty Images)

Medical debts affect the most vulnerable

Inaccurate medical billing data has long plagued consumers and the credit reporting system, often hurting the most vulnerable and uninsured.

Kaiser Family Foundation data found that 23 million people — nearly 1 in 10 adults — face significant medical debt. Approximately 16 million Americans owe over $1,000 in medical debt, and 3 million owe medical debt that exceeds $10,000. Young adults and low-income individuals (including veterans and older adults) are heavily impacted by debt.

Black and Hispanic Americans were also more likely than other racial and ethnic groups to have past-due medical payments. An estimated 28% of Black and 22% of Hispanic individuals were behind on medical debts, followed by 17% white and 10% of Asians, according to the CFPB.

Medical debt is more prevalent in the southeastern and southwestern states, partly due to states in those regions not expanding Medicaid coverage – further underscoring that uninsured patients are often unable to front medical care costs.

As a result, these populations were at higher risk of being exposed to outdated credit models, said the report. By wiping medical debts from credit reports, the CFPB said lenders can focus on more reliable sources to measure consumers’ credit risk and payment patterns.

“There's a push from the CFPB and the lending industry to say, medical debt may be a little apples to oranges here,” Rossman said. “If it's a one-time, maybe literally life-and-death kind of situation, that's different than your month in, month out credit card bills, car loans.”

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

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