Most medical debt soon to vanish from credit reports

The country’s major credit-reporting firms will soon remove roughly 70% of medical collection debt from Americans' credit reports.

Why it matters: Medical debt is the most common source of collection-related blackmarks on credit reports. It can lower people’s credit scores, making it harder or more expensive to secure mortgages, auto loans and other credit — and even make it harder to secure a job.

• The issue is also shown to disproportionately impact Black and Hispanic people, as well as all young adults and low-income individuals, according to the Consumer Financial Protection Bureau (CFPB).

What's new: The three major credit reporting agencies, Equifax, Experian and TransUnion, outlined three changes in reporting that are expected to eliminate more than $60 billion of debt from existing reports.

• First, all paid medical collection debt will no longer be included in reports as of July 1.
• In addition, people will have 12 months, up from six, to settle medical bills before unpaid collection debt appears on reports.
• The third change, slated for the first half of 2023, will eliminate the reporting of all medical collection debt under $500.

The third change is notable, as most medical collections on credit reports are low-dollar accounts. Data from a recent national sampling for the CFPB showed a median medical collection amount of $310 in 2020, with 62% of collections under $490.

The backstory: The agencies pointed to the COVID-19 pandemic and the prevalence of medical collection debt on credit reports as catalysts for the changes, and said they will help people "focus on their personal wellbeing and recovery."

• But they have also been under pressure from the CFPB, which has focused on credit reporting and inaccurate medical debts in particular, under director Rohit Chopra.

The big picture: Medical debt collections are considered less predictive of future payment problems than other debt collections, as people rarely choose to incur it. (You agree to pay back a loan before taking the keys to a new car, but you don’t necessarily plan to be accountable for a medical bill).

• According to the Kaiser Family Foundation, two-thirds of medical debts are the result of a one-time or short-term medical expense arising from an acute medical need.
• Certain newer credit models used by the reporting agencies already take this into account, but some widely-used models do not — particularly the older FICO models required for federally-backed mortgages, notes Ted Rossman, senior industry analyst at Bankrate.

What they’re saying: "Medical collection debt often arises from unforeseen medical circumstances. These changes are another step we're taking together to help people across the United States focus on their financial and personal wellbeing," said the CEOs of the reporting agencies in today's statement.