The three major credit reporting bureaus are set to wipe the majority of medical debts from consumers’ credit reports in July. That means millions of Americans — including those most financially vulnerable — could see their credit scores substantially improve.
“For some people, it could lift their credit score 100 points or more, somebody who otherwise had really good credit and is dragged down by this one instance of medical debt,” Ted Rossman, Bankrate.com senior industry analyst, told Yahoo Finance Live (video above). “And that's really emblematic of what's happening here.”
As of June, more than 43 million Americans owe an estimated $88 billion in medical debt, but that figure is likely higher as not all medical debts in collections are fitted to consumer reporting agencies, according to the Consumer Financial Protection Bureau.
The real problem: Once those bills are sent to collection agencies, people can suffer from long-term repercussions – including risk of bankruptcy, avoidance of medical care, and difficulty securing employment, according to the report. In the second quarter of 2021, 58% of all bills in collections were medical bills.
Fortunately, some Americans can look toward a fresh start and potential improvement in their creditworthiness in the coming months.
“I think the industry is moving more towards credit-like obligations, things like buy-now-pay-later, streaming plans, cell phones,” Rossman said. “Those seem more reflective of credit risk than things like medical debt and traffic tickets.”
Starting July 1, Experian, Equifax, and TransUnion will remove approximately 70% of medical collection debt tradelines from consumer reports. “Paid medical collections are going to come off of credit reports starting in July. So that's a really big improvement for a lot of people,” said Rossman. “These are all changes that I think will help a lot of people's credit scores.”
In addition to removing the majority of medical debts from consumers’ reports, unpaid medical debt will take a year – not six months – to show up on a person’s credit report. Finally, in the first half of 2023, medical debts under the amount of $500 will not be recorded, the credit bureaus said.
The move to eliminate medical debts from consumers’ credit reports follows a CFPB analysis that called medical billing and collection practices “concerning” because a lack of transparency in the system often left families trapped in a “doom loop between provider and insurance companies” as they tried to sort out bills to no avail.
Kaiser Family Foundation data found that 23 million people — nearly 1 in 10 adults — face significant medical debt. Approximately 16 million Americans owe over $1,000 in medical debt, and 3 million owe medical debt that exceeds $10,000. Young adults and low-income individuals (including veterans and older adults) are heavily impacted by debt. To read more click here.