Medical Debt and Credit Scores

Dec 18, 2014 by

medical debt and credit scoresProminent among the several appallingly inhumane features of the U.S. health insurance + care system is the astounding number of Americans whose financial lives are wrecked merely because they got sick or injured. Why is the U.S. the only first world nation to tolerate health insurance + care driven by the, helpful in many other contexts, profit motive? If any of you dear readers can explain why, for example, a human being born into economic wealth should merit better health care than a human being born into economic poverty, I’d be much obliged.

The U.S. Health Insurance / Care System’s Financial Toll on Americans

The #1 reason for bankruptcy in the U.S. is medical expense. The next most common reason—job loss—is a distant second.

According to the Consumer Financial Protection Bureau (CFPB), roughly half of all collections that appear on credit reports are reported by debt collectors seeking to collect on medical bills claimed to be owed to hospitals and other medical providers.

One of every five Americans has an unpaid medical debt in collections on their credit report. On top of being subjected to the routinely nasty abuse of debt collectors, any debt in collections devastates a credit score. A poor credit rating has much more far reaching effects than making loans expensive. Read “Who Checks Your Credit Score?” to learn more.

Also according to the CFPB, “[a]mong consumers who have submitted complaints to the Bureau about debt collection problems, medical collections complaints are much more likely to be about the existence, amount, or information pertaining to the debt than non-medical collections complaints.” In simpler words, people may not pay a medical debt because they can’t understand, nor get anyone to explain to their satisfaction, their bill!

A large portion of consumers with medical debts in collections show no other evidence of financial distress and are consumers who ordinarily pay their other financial obligations on time, according to the CFPB. More specifically, of consumers with only medical collections, approximately 50 percent have otherwise “clean” credit reports with no indication of serious past delinquencies. 15 million Americans sole unpaid bill on their credit report is a medical bill.

CFPB Working to Lessen Medical Debt’s Impact on Credit Scores

In May the CFPB announced the results of an analysis concluding that consumers “may be overly penalized for medical debt that winds up on their credit report” because “credit scoring models may be underestimating the creditworthiness of consumers who owe and pay back medical debt in collections.”

The Fair Isaac Corporation, creator of the widely used FICO® credit score, seemed to respond in building its latest version, FICO 9. In the FICO 9 formula, medical collections will have a lesser impact than non-medical debt in collections.

A December 11 CFPB press release announced that the Bureau will be “requiring major credit reporting companies to provide regular accuracy reports to the Bureau.”

Data required by the new accuracy reports will allow the CFPB to track the top industries (e.g., medical) reflected in the bureaus’ credit reports and the total number of consumer disputes generated by those industries.

For each of the top industries named, the credit reporting agency must also name the top furnishers of consumer debt information with the largest number of consumer disputes.

CFPB’s Recommendations to Consumers

The CFPB has also published an advisory, “7 Ways to Keep Medical Debt in Check”.

While modestly useful in helping Americans validate their medical bills and avoid inadvertently making a medical debt worse (by, for example, using a credit card to pay it), unfortunately the CFPB’s advisory does not—because it cannot—address the core problem: People getting sick within the most costly (per capita) health care system in the world combined with a health insurance industry governed by the profit motive.

Have you understood every medical bill you’ve paid? Have you abandoned hope of ever understanding a medical bill and just paid it anyway? Has your credit score been zapped because you declined to pay a medical bill you did not understand or that seemed to you inaccurate?

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