Opinion: The Case for Erasing Medical Debt from Credit Files

You may have thought you knew the status of medical debt on credit reports — but you probably don’t. That’s because changes in this arena have been coming fast and furious.

The latest news: The Consumer Financial Protection Bureau issued an “interpretive rule,” stating that federal guidance should preempt state laws on the matter. 

This development reveals two things: First, a rather heavy-handed federal approach, at odds with the GOP’s traditional embrace of states’ rights. And second, a poor understanding of whether medical debt is an accurate predictor of creditworthiness. (It’s not.)

To get you up to speed: A previous decision of the CFPB, banning the reporting of medical debt to credit agencies? Revoked, after a court decision in July. The Biden-era guidance that states have the right to craft their own legislation on the matter? Now overridden.

This latest wrinkle arrived at the end of October, and affects the 15 states — including New York and California — that restrict the reporting of medical debt in some fashion.

In other words: If you have medical debt that’s long overdue, it can absolutely appear on credit reports. That, in turn, will affect consumers’ ability to secure loans for cars and mortgages, qualify for insurance coverage, get jobs or rental apartments, and more.

For the industry, the central point here is certainly rich for debate: Does the presence of medical debt indicate how likely people are to pay their bills?

Health issues are a unique case, for a couple of different reasons. It’s not like, say, running up a big unpaid credit-card bill at Bloomingdale’s, which suggests a tendency of reckless or profligate spending.

That’s because health crises can hit anyone, at any time — big or small, black or white, young or old. As such, medical issues aren’t a reflection on the character of the borrower.

Moreover, everyone who has ever dealt with health insurers knows how byzantine and inscrutable and snail-paced the whole process is. As a claim works its way through the system, it can take significant time for paperwork to be filed and for coverage decisions to be made — by the doctor, by the hospital, by the insurance company. 

The latest news: The Consumer Financial Protection Bureau issued an “interpretive rule,” stating that federal guidance should preempt state laws on the matter. 

That means for extended periods, patients may not even know what they owe, or to whom, or by when they need to pay it. And if particular coverage decisions are being reviewed or challenged, that can restart the clock all over again.

So a lengthy period to repay is not necessarily on the patient, but on the industry as a whole and how it operates. That being said, trade groups like the Consumer Data Industry Association certainly have a legitimate point about transparency.

Financial institutions are making lending decisions every day — sometimes extremely significant ones, such as hundreds of thousands of dollars on a mortgage — and they want as complete a financial picture as possible. 

If a borrower is saddled with crushing medical bills, that is obviously a critical piece of information they would want to know.

But a more nuanced understanding of medical debt is in order. According to the CFPB itself, medical debt has “little predictive value to lenders about borrowers’ ability to repay other debts.” 

Health issues are a unique case. That’s because health crises can hit anyone, at any time, and aren’t a reflection of a borrower’s character.

As a result, credit bureaus designed their own self-imposed guidance: That medical debts below $500 won’t appear on credit reports at all. And for amounts above that, not until they are overdue for at least a year will they show up on credit records.

Those are positive steps, which erase roughly 70% of medical debt from credit reports, and should be kept in place.

Further to that: If individual states review the data, come to their own conclusions, and adopt the stance that medical debt shouldn’t be used in lending decisions, they should have the right to enact that into their laws. Federal rules impinging on the expressed will of 15 different states certainly smacks of overreach.

A final point is a moral one. Take the example of someone who is beset with a health crisis, through no fault of their own, and their credit craters as a result of long-term medical debt.

They are then hampered in their ability to qualify for loans, to secure a job, to get an apartment. So rather than being lifted out of crisis, that crisis is made worse.

That speaks to the underlying strength of a society. Do we pile onto those who are coping with health problems by limiting their credit lifelines and driving them into bankruptcy — two-thirds of whom cite medical issues as a contributing factor? Or do we help sick people rebound with the right legislation?

It’s in the long-term interest of not just consumers, but lenders as well, to help those struggling with medical debt be made whole again — both in their health and in their finances.