Medical debt will be removed from credit reports: What this means for Americans
The Biden administration finalized a new rule this week preventing medical debt from being included in credit reports, as well as prohibiting lenders from using certain medical information in loan decisions.
This is slated to provide relief to millions of Americans whose credit reports or scores have been negatively impacted by unpaid medical bills. For context, about 46 million people had medical debt listed on their reports in 2020, according to the administration.
Here's what this rule means for Americans:
When it takes effect, which is 60 days after publication in the Federal Register, $49 billion in unpaid medical bills will be removed from the credit reports of 15 million Americans, according to the Consumer Financial Protection Bureau (CFPB).
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The administration said this will ensure that patients are no longer denied access to credit for home mortgages, car loans or small business loans.
About 22,000 additional affordable mortgages will be approved every year once the rule takes effect, the CFPB projected.
Americans who currently have medical debt on their credit reports could also see their credit scores rise by an average of 20 points, according to the CFPB.
The new rule will also prevent debt collectors from leveraging the credit reporting system to pressure people to pay bills they do not owe.
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Previously, creditors were allowed to consider medical debts, which enabled "debt collectors to use the credit reporting system to coerce payments from patients for inaccurate or false medical bills," according to the CFPB.
Prohibits lenders from considering medical information
Creditors will no longer be able to use certain medical information in making lending decisions. This means that lenders will also be barred from using information about medical devices, such as prosthetic limbs, to require that the devices serve as collateral for a loan for the purposes of repossession.
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Bans medical debt on credit reports
Consumer reporting agencies will be banned from including medical debt information on credit reports and credit scores sent to lenders. This will help end the practice of using the credit reporting system to coerce payment of bills regardless of their accuracy. However, lenders will still be able to consider medical information to verify medical-based forbearances, verify medical expenses that a consumer needs a loan to pay, consider certain benefits as income when underwriting and other legitimate uses.
In 2023, after the CFPB raised concerns about medical debt credit reporting, three nationwide credit reporting conglomerates – Equifax, Experian and TransUnion – agreed to take certain types of medical debt off of credit reports, including collections under $500.
Major credit scoring companies FICO and VantageScore also decreased the degree to which medical debt affects a consumer’s score.
Even with the changes, 15 million people still had outstanding medical bills in collections appearing in the credit reporting system.