Opinion: Why Medical Debt Can Mislead Your Underwriting — and How to Avoid Costly Rejections

Lenders are all about avoiding risk. That’s why the debate over including medical debt on credit reports is so embattled. But medical debt is one of the least reliable indicators of credit risk.

Its presence on credit reports can unfairly penalize otherwise strong borrowers — especially in subprime markets. 

Collections on medical debt aren’t a result of poor financial management that can include missed loan payments and high credit card balances. They may point to billing disputes or unexpected health crises.

Responsible lenders must assess a credit applicant’s ability to repay loans while balancing risk and driving business growth. 

A borrower’s detailed credit history, including account age, debt levels relative to credit limits, and payment timeliness, offers a predictive view of their creditworthiness and allows lenders to extend credit to reliable borrowers. These details help lenders make informed decisions that minimize defaults.

But high medical debt that is reported after collection agency involvement distorts this picture. It can lead to flawed underwriting, unnecessary rejection rates, and missed opportunities to serve creditworthy borrowers.

Why Medical Debt Isn’t a Reliable Risk Indicator

While credit card and loan balances can point to a consumer’s financial behavior, medical bills often originate from the affordability crisis in healthcare.

In a 2024 article in the Federal Register, the Consumer Financial Protection Bureau (CFPB) noted that medical debt has limited predictive value for credit underwriting. 

The report highlighted how third-party reimbursement processes and inconsistent debt collection practices contribute to errors and consumer confusion about medical bills. 

Such inaccurate data can distort a borrower’s real financial health, prompting lenders to overstate risk and reject qualified applicants or charge them inflated interest rates. This drives away customers and weakens a lender’s competitive position.

The stakes are even higher in subprime markets, where medical debt falls most heavily on lower-income consumers. 

The number of people who are affected by medical debt is enormous. According to the West Health-Gallup Healthcare Survey, 58% of U.S. adults report they would face medical debt from a major health event, and 31 million would need to borrow to cover costs. 

Even 16% of households earning $180,000 or more worry about affording medical bills, underscoring the widespread burden of medical costs.

The Battle Over Medical Debt Reporting

The Consumer Financial Protection Bureau (CFPB) during the Biden administration pushed to exclude overdue medical bills from credit reports, arguing they unfairly penalize consumers for problems associated with healthcare rather than a person’s financial mismanagement.

But Judge Sean Jordan of the U.S. District Court of Texas Eastern District reversed the CFPB’s decision to exclude medical debt over $500 from credit reports in July 2025. The ruling means that high-value medical collections can once again appear on reports as delinquent liabilities.

Low-income and credit-challenged borrowers are hit hardest. They are often forced to choose between medical bills and other debts, which further hurts their credit profiles.

Meanwhile, reintroducing medical debt to credit reports clouds underwriting for lenders and makes reliable borrowers appear risky. The resulting higher rejections or interest rates mean lost business and alienated customers. 

A Numerical Approach to Credit Assessment Can Help

Using credit scoring models that zero in on true risk indicators is the challenge facing lenders who wish to see more inclusivity in their decisions. VantageScore excludes medical debt from its calculations, recognizing its lack of predictive value. And while FICO factors in medical debt, it assigns it less weight than other obligations. 

Decreasing the value of medical debt in underwriting decisions can help lenders identify risk with better accuracy.

Lenders that align their underwriting with these models and focus on traditional credit metrics (such as payment history on loans and credit cards) can better identify low-risk borrowers, even when medical collections appear on their reports. 

This allows lenders to expand approvals in prime and near-prime segments without increasing loss rates, set appropriate interest rates, and offer suitable credit lines.

The Lending Strategy Amid the Battle 

The discussion regarding whether to remove medical debt from credit reports may not be over. Until it is, lenders will continue to carefully weigh the risks when evaluating applicants with medical debt on their credit reports.

After all, a borrower with otherwise timely payments shouldn’t face the same scrutiny as a person who has missed loan payments or racked up a huge balance on their credit cards. 

Excluding medical debt from the underwriting process allows lenders to focus on a borrower’s true financial behavior. Many people who have these collection accounts are good credit candidates.

Approving them not only builds customer loyalty but can give you, the lender, a competitive advantage as you access a larger pool of qualified borrowers.