Feds: Medical debt ruining credit scores

Hospital bills are adding financial insult to physical injury for many Americans, according to a new federal study that found consumer credit scores are being unfairly penalized for medical debt.

The report, issued Tuesday by the Consumer Financial Protection Bureau (CFPB), concluded that credit-scoring models systematically underestimate the creditworthiness of consumers who owe medical debt in collections.

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Current practices could also fail to properly credit the scores of people who were previously in collections but have repaid their medical bills, the report found. 

“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs,” CFPB Director Richard Cordray said. “Those costs should not be compounded by overly penalizing a consumer’s credit score.”

While medical debt is generally treated the same as a missed mortgage payment or an unpaid cellphone bill on credit reports, it is fundamentally different, Cordray argued.

Unlike most debt, consumers often don’t know the costs of doctor visits or hospital stays upfront. Confusion over repayment amounts and the extent of insurance coverage is also common.

More than half of all collections on credit reports are linked with some form of medical debt, but those reports overwhelmingly come from third-party agencies, and consumers often are unaware that their account has been sent to collections, Cordray said.

Based on the study, which anonymously considered the credit records of some five million people over a two-year period, the CFPB is urging changes in the way credit reporting agencies tabulate ratings.

“Scores could be more predictive if they treat medical debt and non-medical debt differently,” Cordray said.

He stopped short, however, of suggesting regulations requiring the change are in order.