"Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer's credit score," said CFPB Director
The study, "
Consumers' three-digit credit scores are based on information in their credit reports, compiled by credit reporting agencies, also called credit bureaus. These scores play an increasingly important role in the lives of American consumers because most lenders decide to grant credit and set interest rates based on them. When overdue debt goes to collections and ends up on a consumer's credit report, it decreases a consumer's score. This means lenders are likely to take more caution when lending money because the consumer is perceived as less likely to pay it back on time.
According to a study by the
Many current credit scoring models do not differentiate between medical and non-medical debt in collections. This is true even though medical debt is different than other unpaid bills reported by collection agencies, such as unpaid phone or utility bills. Medical debt can result from an event that is unpredictable and costly. Sometimes the debt is caused by billing issues with medical providers or insurers. Complaints to the
Today's study considered 5 million anonymized credit records from
The study found that credit scoring models have not been considering medical debt as well as they could be. It found that if the credit scoring models accounted differently for medical debt in collection and medical debt that is repaid by the borrower, the models could be more precise. Specifically:
- Credit scores may underestimate creditworthiness by ten points for consumers who owe medical debt: Treating medical and non-medical debt that goes to collections the same overly penalizes some consumers by giving them lower credit scores. Specifically, the study found that consumers with medical debt generally paid back their loans or bills on par with consumers with scores about ten points higher. Allowing for different treatment of medical and non-medical collections in credit scoring models may increase the scores of consumers with medical collections and improve credit scoring.
- Credit scores may underestimate creditworthiness by up to 22 points after paying off medical debt: Traditionally, credit scoring models have not accounted for repayment of medical debts in collections. The study found that consumers who subsequently paid medical debt that had gone into collections were more likely to pay back their debts, on par with consumers with scores 16 to 22 points higher. Allowing for different treatment of paid and unpaid medical collections would likely result in increased scores for consumers who have paid their medical collections in full.
For consumers with lower credit scores, especially those on the brink of what is considered subprime, a ten- to 22-point difference can affect their interest rates and ability to borrow credit. Over time, the score difference could end up costing a consumer tens of thousands of dollars on large loans like home mortgages.
In 2012, the
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