Medical debt is unfairly ruining the credit reports of too many Americans, according to
a new study by the Consumer Financial Protection Bureau (CFPB).
Credit reports are interwoven into people's financial lives, and can determine whether they get credit cards, car loans or mortgages — and at what rate.
Rich Cordray, director of the CFPB, said it appears consumers' credit scores are "overly penalized for medical debt that goes into collections and shows up on their credit report."
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"This is because credit scoring models may be underestimating the creditworthiness of consumers who owe and pay back medical debt in collections," he explained.
The Federal Reserve estimates that more than half of all collections on credit reports are associated with medical bills. The information loaded into the reports typically comes from third-party collection agencies.
According to Corday, medical bills are not like other debts. "When you take out a loan, typically you know how much you will owe and the interest rate you will be charged up front. But with medical costs, you have less visibility. Costs are often unknown until after treatment," he said.
Because of confusion over billing and questions about what insurance will pay for, the CFPB noted, many consumers are unaware they have a medical debt in collections until they get a call from a debt collector or discover the debt on their credit report.
The agency studied 5 million credit reports, using data from 2011 to 2013, and found credit scores are underestimating the credit worthiness of consumers with medical debt by approximately 10 points.
According to Cordray, the agency's research showed that "having a medical debt in collections is less relevant to a consumer's creditworthiness than having an unpaid cell phone bill or overdue rent."
He said the CFPB also concluded that credit scoring models also understate the credit worthiness of consumers who have repaid their medical collections in full by a median of 16 to 22 points.
Cordray noted that the lower scores from medical debt are unjustified, and "may cause consumers to be denied a loan altogether or they could cost tens of thousands of dollars over the life of a home mortgage."
The CFPB recommends that medical debt be broken out and considered separately from other debt by the credit scoring agencies.
According to estimates from
NerdWallet Health, medical bankruptcy now accounts for the majority of personal bankruptcies in the United States.
NerdWallet said data from the Census Bureau and other sources showed 56 million Americans younger than 65 had trouble paying medical bills in 2013, more than 15 million Americans used all of their savings paying medical bill in 2013 and approximately1.7 million Americans live in households that had to declare bankruptcy because of their medical bills.
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