Medical Debt Wreaks Havoc on Consumers’ Credit Reports

Medical Debt Wreaks Havoc on Consumers’ Credit Reports

The Consumer Financial Protection Bureau (CFPB) released a report that reveals that over 1 in 5 consumers, or 43 million, have black marks on their credit reports for medical debts, and that medical debts constitute over half of debt collection items on credit reports.

Chi Chi Wu of the National Consumer Law Center said “This report is another example of the powerful information revealed by CFPB’s groundbreaking research.”

Medical debt is different from other types of consumer debt. Medical debt is unique because the most vulnerable patients – the uninsured and underinsured – are often billed “chargemaster prices” which are much higher than prices charged to private and government insurers. Many of these may be eligible for charity care from a hospital or insurance coverage such as Medicaid.

Ms Wu said the CFPB should take steps to protect consumers from the harms caused by medical debt collection by:

  • examining the larger medical debt collection agencies;
  • requiring debt collectors to give consumers a notice before placing or “parking” medical debt on their credit reports;
  • require that consumers be given time to deal with insurance disputes or billing errors, or to apply for financial assistance or charity care, before a debt can be reported to a credit reporting agency;
  • preventing damage to a consumer’s credit score from medical debts that are disputed or result from billing errors; and
  • prohibiting debt collectors from dunning low-income consumers for inflated chargemaster prices.

Pending in Congress is a bill that would help the 43 million consumers facing medical debt, the Medical Debt Responsibility Act, H.R. 1767/S. 160. The bill would require credit reporting agencies to remove paid or settled medical debts from credit reports.

One helpful change is that the credit scoring developers FICO and VantageScore have made changes to their scoring models to reduce the impact of medical debt. One problem is that Fannie Mae and Freddie Mac require the use of an older FICO scoring model that does not include this change so currently those applying for mortgages who have medical debt on their credit reports won’t be helped. Consumer groups led by NCLC advocates have asked the regulator for Fannie Mae and Freddie Mac to update their credit scoring formulas.


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