An unpaid medical bill from a hospital stay months or years ago could be disproportionately affecting your credit score, according to a study released today by the Consumer Financial Protection Bureau.
The study found that the the equations that formulate people's credit scores may be underestimating the creditworthiness of people with unpaid medical debt or who recently have paid off medical debt.
Overly penalizing a credit score can have serious implications, CFPB Director Richard Cordray said in a press call Tuesday.
"For consumers with lower scores, such as those on the brink of being classed as subprime, these differences can be more significant," Corday says. "They 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."
While the CFPB's report does not offer specific solutions, it suggests that credit scoring models ought to treat medical and nonmedical debt differently.
"Given its enormity, given its influence over people’s lives, and given its broad impact on our overall economy, there is undeniably much at stake in ensuring that credit reports and credit scores are working properly for both consumers and creditors," Cordray says.
Penalized for debt you don't know you have?
Medical debt is the most common type of collection, accounting for more than half of all collections on credit reports, according to the Federal Reserve.
The Commonwealth Fund, a nonprofit health research group, found in 2012 that about 41 percent of Americans ages 19-64 have experienced problems with a medical bill (such as having problems paying it, being contacted by a collection agency, etc.) or had accrued medical debt in the past year. Of those people, 42 percent say they've received a lower credit rating because of that medical debt.
"This has long-term consequences for their financial security," says Sara Collins, a vice president at the Commonwealth Fund. "The point is, you want to send the right signals to people to get the health care they need. Having a risk that might cause long-term damage to your creditworthiness seems to be the wrong message to send to people. ... It does seem that debt should be dealt with differently."
The CFPB says complaints it receives indicate that many people don't even know they have medical debt until a collection agency calls or they find it on their credit reports.
"Sometimes they do not know what they owe because of how complicated the billing process can be. Other times, they may not even know they owe anything, thinking that their insurance will cover the bill," Cordray says. "Sometimes the debt is caused by billing issues with medical providers or insurers."
Weighing unpaid medical bills
The use of medical debt in credit reports and credit scores has been debated for years.
A 2004 Federal Reserve bulletin notes:
"Credit evaluators also have some concern about the appropriateness of using medical collection items in credit evaluations because these items (1) are relatively more likely to be in dispute, (2) are inconsistently reported, (3) may be of questionable value in predicting future payment performance, or (4) raise issues of rights to privacy and fair treatment of the disabled or ill."
The CFPB's latest study, which looked at 5 million credit reports, found that people with medical debts generally paid back their loans or bills on par with consumers who had scores about 10 points higher. It also found that those who have paid off medical debts had scores about 16 to 22 points below someone else with a similar repayment history.
Anthony Sprauve, spokesman for FICO.com, says his company has been researching consumer credit data and making changes to have a "more nuanced approach" as it prepares to launch FICO Score 9 later this year.
"As part of this refined credit assessment, medical collections will have a smaller impact than nonmedical collections," he says, noting also that "medical debt is a serious issue affecting many Americans."
For more, check out Bankrate's article "How will unpaid medical bills hurt credit?"
What do you think of the CFPB's study? Have you ever had a problem with medical debt?
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