Consumer Credit Scores Improve After Medical Debt is Wiped from Reports

After major credit bureaus stopped reporting medical debt collections less than a year old and less than $500, consumers saw improvements in their credit scores, according to data from the Urban Institute.

Medical debt can lead to financial challenges, especially when unpaid debt is sent to collections and winds up on consumer credit reports.

Medical debt does not accurately predict a person’s credit risk, as unpaid bills could reflect issues with understanding healthcare billing and reimbursement processes. However, having medical debt in collections could impact someone’s ability to get insurance, find a job, or rent a home.

Last year, three major credit bureaus—Equifax, Experian, and Transunion—announced that starting July 1, 2022, they would increase the time before past-due medical debt collection appears on a consumer credit report from six months to one year.

In August 2022, the Vantage score consumer credit model, one of the country’s most used models, stopped using medical debt in collections to calculate credit scores. Furthermore, in April 2023, the three major credit bureaus removed medical collections under $500 from consumer credit reports.

According to the Urban Institute’s credit bureau data, these changes have eliminated medical debt in collections from most consumers’ credit reports.

In August 2022, 11.6 percent of consumers had medical debt in collections on their credit reports. By August 2023, the share declined to 5.0 percent. Urban Institute researchers estimated that more than 15 million consumers have benefitted from the debt erasure in the past year.

Additionally, consumers’ credit scores have increased since the changes were implemented. Between August 2022 and August 2023, the average credit score among consumers with medical debt collections in August 2022 rose from 585 to 615 points. This shifted many consumers from a subprime level (below 600) to near prime level (between 601 and 660).

At the same time, the average credit score for consumers without medical debt on their records remained largely the same, going from 712 to 711 between August 2022 and August 2023.

These findings indicate that future medical debt reporting restrictions could continue benefiting consumers. The Consumer Financial Protection Bureau (CFPB) recently proposed a rulemaking process that aims to remove all remaining medical bills from consumer credit reports.

Additionally, two states have taken legislative action to address the issue. Colorado’s law banning medical debt from appearing on credit reports went into effect in August 2023, while New York’s law passed the state legislature in June 2023 and is currently being reviewed by the governor.

Although these policies may help consumers have better credit scores, they do not address the numerous other challenges accompanying medical debt, including the fact that consumers will still owe the debt to their healthcare providers.

Most hospitals, providers, and collection agencies can still sue patients for not paying medical bills. In addition, removing medical debt from credit reports may cause these entities to increase their efforts to receive upfront payments before delivering care, the report mentioned.