WASHINGTON — The three largest credit bureaus in the U.S. announced Friday they would begin removing most medical debt from their reporting process starting in July, meaning many Americans with late or unpaid medical bills could have the stains from those bills wiped off their credit.
The three companies — Equifax, Experian and TransUnion — are responsible for figuring out the credit score used by banks, loan offices and other financial institutions to determine how likely a person is to pay back a loan or debt.
The "significant changes" announced Friday will remove nearly 70% of medical collection debt from consumer credit reports, TransUnion said in a statement.
The company cited months of industry research and information about the kind of debt incurred by most Americans in reaching the decision to change the longstanding practice of how debt is calculated.
According to the Kaiser Family Foundation, about two-thirds of medical debts come from medical expenses that arise from an urgent need and are usually one-time or short-term charges.
The credit reporting agencies said the COVID-19 pandemic was part of the reason they felt the change was necessary, due to the number of medical bills racked up by patients with COVID.
Some credit score models, which are used to determine somebody's credit score for what is known as a "soft pull" check, have already stopped looking at medical debt. VantageScore and FICO, both popular services for credit checks, began disregarding paid medical debt several years ago and de-emphasized unpaid medical debt compared to other bills.
However, a "hard pull" used when taking out a large loan — such as when applying for pre-approval to purchase a home — tends to use scores generated by the major credit agencies.
What's changing
As of July 1, any paid debt will be wiped from the credit reports of consumers, meaning that any late payments won't damage their credit.
The credit reporting agencies will also increase the time period before unpaid medical debt will appear on a person's credit from six months to a year. The extra delay is designed to give people more time to pay back their bills.
And sometime in the first half of 2023, none of the three major credit agencies will include medical debt under $500.
“Medical collections 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 a joint statement provided by Mark W. Begor, CEO Equifax; Brian Cassin, CEO Experian; and Chris Cartwright, CEO TransUnion. “As an industry, we remain committed to helping drive fair and affordable access to credit for all consumers.”
What it means
The move is huge for millions of Americans because a credit score is one of the most significant factors lenders use to determine their ability to get a mortgage, car loan or start a business. It can also impact somebody's ability to get a job or rent an apartment.
The Consumer Financial Protection Bureau, a federal watchdog, has previously criticized the nation's billing system for medical expenses, saying that it often failed consumers through errors in billing that are common on credit reports.
The agency found an estimated $88 billion in medical expenses weighing down the credit scores of Americans.
These errors can be difficult and costly for consumers to fix, and even paying any late bills doesn't help in some cases. Marks against somebody's credit can last for nearly a decade even if an error put them there.
Without the marks from the credit agencies, some people could have their credit score jump by hundreds of points.
"Few people choose to take on medical debt, yet millions of Americans have experienced credit report coercion: where they are pressured to pay medical bills they may not even owe, to prevent a black mark on their credit report that can threaten their employment, housing, and credit prospects," a CFPB spokesperson said in a statement. "This is particularly egregious since the CFPB’s prior research has demonstrated that medical billing data reported on credit reports is typically an unreliable indicator of people’s ability to pay their bills."
Who benefits
The CFPB says that about 20% of U.S. households have some kind of medical debt in 2022.
The move by the credit agencies is expected to effectively wipe away tens of billions of dollars in derogatory marks against the credit scores of U.S. consumers.
The removal of debts under $500 is particularly important for Americans, because most unpaid medical debt is below that mark, according to the CFPB.
Medical debt is different from regular consumer debt because Americans often don't decide to take it on. Emergencies and unexpected injuries are impossible to predict, and rising inflation in the U.S. has left many with even slimmer pocketbooks than normal.