Advice | Finally, medical debt under $500 has been removed from credit reports

Should your credit score suffer, setting you up for higher-priced loans, because of medical debt for an accidental injury?

The cost of health care in the United States is highly expensive, unpredictable and often based on factors out of people’s control. Being billed for a medical condition or emergency isn’t the same as deciding to get a mortgage, in which you are choosing to take on the debt obligation.

If you need emergency care, you’re not likely to tell the physician, “No, I don’t think I can handle the expense of fixing my broken leg. Let me just limp home and comparison shop.”

Medical billing practices can put a strain on people’s budgets and, for many, propel them toward bankruptcy. A survey conducted by the American Journal of Public Health of bankruptcy filers found that the majority said medical expenses contributed to their seeking relief.

On Tuesday, the three major credit bureaus — Equifax, Experian, and TransUnion — announced that medical collections with balances of $500 or less would no longer appear on consumer credit reports.

This is a significant step in helping millions of people — particularly those who are young and on the lower end of the wage scale — who rely on having a good credit score to get an apartment or an affordable loan.

“We understand that medical debt is generally not taken on voluntarily, and we are committed to continuously evolving credit reporting to support greater and responsible access to credit and mainstream financial services,” the chief executives of the credit bureaus said in a joint statement.

With this change, nearly 70 percent of all medical debt sent to collections is no longer part of consumer credit files, the executives said.

The Biden-Harris administration announced plans last year for medical debt reforms. It includes directing the Department of Health and Human Services to look at providers’ billing practices and helping veterans get their medical debt forgiven.

The point of credit scoring is to predict who is likely to default on their debts. In a report last year, the Consumer Financial Protection Bureau questioned whether this type of debt should be reported to the credit bureaus and thus factored into credit scores.

“Unlike many other consumer debts, people rarely plan to take on medical debt,” the CFPB report said. “Two-thirds of medical debts are the result of a one-time or short-term medical expense arising from an acute medical need. Medical debt is also unique in that people have less ability to shop around for medical services.”

Even the most cost-conscious consumers can find themselves saddled with bills for medical services. Prices vary tremendously and are usually higher for the uninsured or for people with health coverage but using out-of-network providers. Even in-network costs can vary widely between different facilities or departments.

And we know many people avoid getting the care they need because they rightly fear the financial consequences.

To grasp why this removal is so important, you have to understand the gravity of these small-dollar debts. It’s not just one bill under $500. People are often receiving multiple bills from different health-care providers. According to the CFPB, $88 billion of outstanding medical bills are in collections — affecting 1 in 5 Americans.

Federal watchdog questions whether credit reports should include medical debt

Here are other disturbing statistics from the CFPB about the most common collection tradeline reported on consumer credit records.

  • As of the second quarter of 2021, 58 percent of bills that are in collections and on people’s credit records are medical bills.
  • Medical debts constituted 68.9 percent of accounts reported by debt collection companies that base their fee on how much they collect.
  • Credit scores are lower in the South largely because of medical debt.
  • People with low incomes, veterans and older adults are significantly impacted by medical debt. Black and Hispanic consumers are disproportionately more likely to have medical debt. “Due to racial inequities in health and wealth, the medical debt crisis has impacted Black families more acutely than White families,” according to a 2022 report from the National Consumer Law Center.”

Credit scores are supposed to be race-neutral. That’s impossible.

The action by the credit bureaus is the latest move to get rid of health-care debt plaguing Americans and contributing to lower credit scores. Even folks with good health insurance can find themselves in medical debt.

Last year, the credit bureaus removed all medical collection debt that had been paid by the consumer in full. Additionally, the time period before unpaid medical collection debt appears on a consumer’s credit report was increased from six months to one year, giving consumers more time to address such debt before it appears in their credit files. Often these debts are reported to the credit bureaus because of payment delays by people’s insurance companies. Or there are billing errors.

Despite recent steps forward, we still should be exploring whether all medical debt should be removed from people’s credit files.

“Approximately half of all people with medical collections on their credit reports will still have medical collections on their credit reports, and the majority of the bills, by dollar amount, will remain,” according to an emailed statement from CFPB spokeswoman Tia Elbaum.

Medical bills still plague Americans, more than a decade after the ACA

Elbaum said people who live in the southern and western parts of the country, as well as those who live in lower-income neighborhoods, are least likely to benefit from the change and are most likely to continue to have medical items reported on their credit reports.

Newer credit scoring models don’t weigh medical collections as heavily as other forms of credit. And when such data is removed, people’s scores can jump significantly, as much as 25 points, according to the CFPB.

Here’s what one consumer wrote to the CFPB in a complaint about an emergency room visit: “I called and asked for an itemized invoice, trying to understand how five minutes with a doctor who essentially told me not to worry, that my daughter was fine, could cost $1,500. The response I received was that that was the flat rate the hospital charges my insurance company.”

I’m all about personal responsibility, but tell me how this kind of excessive pricing predicts someone is creditworthy.

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