Medical Debt Credit Score Reform Hopeful
Medical Debt Credit Score Reform Hopeful
UPDATE: New FICO 9 will not count paid medical debt in collections as a negative! This policy, first reported in August, 2014 will make an enormous difference in the credit scores of those with large amounts of medical debt in their credit reports. Unpaid medical bills will be counted less while paid medical bills will be completely ignored. A consumer with a median credit score of 711 that is weighed down by medical debt could see an increase of 25 points or more if the debts are paid. The lender must first adopt the FICO 9 system for this to matter. Some lenders are slow to do this. Many have not even adopted FICO 8 yet so don’t be too confident that this will immediately apply to your new application.
An astounding percentage of negative credit report entries are caused by alleged unpaid medical bills. As hard as it may be to believe over half of the negative entries on credit reports in the country are caused by disputes over unpaid medical bills. The American Medical Association’s own Annual Report Card found a 10 percent error rate on paid medical claims for 2012.
Many times consumers are unaware of the presence of this negative information on their credit reports until they are turned down on a 0 percent balance transfer offer or something of that nature. Richard Cordray of the CFPB has commented that, unlike loans where the costs are known going in medical costs have less visibility. They are often unknown until after treatment.
Remember when applying for a mortgage your lender will likely scrutinize your credit reports in detail. There is nothing to stop them from considering medical debt in its decision as to whether or not you can afford the mortgage regardless of what your FICO score may be.
Medical Debt Credit Score Causes
Not all or even most of the medical debt that drags down so many credit scores is the result of willful non payment. Billing errors are common. The billing system is confusing. What is covered and what isn’t covered? Sometimes bills arrive months later for procedures for which the insurer has declined to pay. 32 Million Americans had credit scores lowered in 2012 for medical debt. 41 Million were contacted by collectors about medical bills in the same year Many consumers are understandably bewildered. Most consumers don’t know how to fight back. The medical bills fall through the cracks and the result is a ruined credit score. These types of problems frequently occur when a consumer is weakened by illness through no fault of their own and unable to cope with yet another financial problem. Until medical debt credit score reform becomes a reality medical bills are just as damaging to credit as any other kind of negative entry.
Medical Debt Responsibility Act of 2013
Reform of the practice of ruining credit scores with medical debt has become an annual affair in Washington. This year there seems to be hope for medical debt credit score reform. Representative Maxine Waters-D-California has introduced HR 1767 the Medical Debt Responsibility Act of 2013. If enacted this law would call for the elimination of negative information on credit reports if the bill has been paid or fully settled. Removal would be required within 45 days. Sen. Jeff Merkley-D-Oregon has re-introduced S2149 the Medical Debt Responsibility Act of 2012. Senator Merkley’s bill calls for essentially the same thing as Rep. Waters’ does.
Consumer Financial Protection Bureau, IRS Speak Out
The CFPB questions whether medical debt is predictive of consumer’s future likelihood of paying. Predictability of default is after all the whole reason for the existence of credit scoring in the first place. To my astonishment support for reform is coming from, of all places the Internal Revenue Service. In exchange for their tax exempt status the IRS would forbid hospitals from taking “extraordinary collection actions.” Reporting debt to the Credit Reporting Agencies would be among these extraordinary actions. Hospitals would first have to certify whether or not a patient qualifies for charity care.