Millions of Americans Could See Their Credit Scores Increase

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Millions of Americans could see their credit scores increase by an average of 25 points after the major credit bureaus removed unpaid medical collections under $500 from their credit reports.

According to an analysis from the Consumer Financial Protection Bureau, folks with medical collections under $500 may see their scores increase by 21 points within the first quarter after their last medical collection is removed from their credit report.

Those with debts higher than $500 could see their credit improve by as much as 32 points.

While the improved creditworthiness could expand access to credit for millions of Americans, many lawmakers say more could be done to mitigate the negative effects of medical debt.

Senator Sherrod Brown (D-OH), Chair of the Senate Banking, Housing, and Urban Affairs Committee, has asked the three main credit bureau CEOs to stop putting medical debt on these reports.

After increasing scrutiny and pressure, Equifax, Experian, and TransUnion all announced they would significantly change how medical collection debt is reported. This is a positive first step, but it is not enough.

Improved creditworthiness

Last month, the nation’s three main consumer reporting agencies announced the removal of medical debt collections under $500 from consumer credit reports.

This move concludes a series of steps that Equifax, Experian, and TransUnion have undertaken since last year following a Consumer Financial Protection Bureau (CFPB) probe on the negative impacts of this type of debt on vulnerable citizens.

In July 2022, the three credit bureaus removed paid medical collection debt from credit reports and increased the time before an unpaid medical collection would appear on a credit report from six months to one year.

With the latest effort, the CFPB’s analysis estimated that approximately 22.8 million people had at least one medical collection removed from their credit reports and 15.6 million had all medical collections eliminated from their credit reports.

The CFPB analysis found that access to credit was expanded after the elimination of medical debt collections under $500 from consumer credit reports. Six quarters after the last medical debt was removed, available revolving credit increased by an average of $1,028, and the total available installment credit increased by $4,123.

Additionally, the consumer watchdog noted that a 20-point improvement in credit score typically lowers the upfront fee on mortgages by 0.25% of the loan balance or $625 in savings for a mortgage of $250,000.

The CFPB analysis also found that consumers are more likely to apply for a mortgage in the first quarter after a medical collection is removed.

The CFPB’s analysis builds on similar findings from other companies. VantageScore found that medical debt provides little effect on predictive performance or borrowers’ payment habits. As of January, the credit score development company decided to eliminate medical debt or medical collection data, regardless of its payment status, from its VantageScore 3.0 and 4.0 scoring models.

“Medical bills going to collections can easily cause someone with otherwise excellent credit to lose 100 points or more off their credit score,” said Ted Rossman, senior industry analyst at Bankrate. “That could make a huge difference in terms of your approval odds and the interest rates you’ll pay on various financial products.”

Some remain unaffected

While the national credit reporting agencies have taken steps to reduce the burden of medical collections from credit reports, medical debt and the system’s lack of transparency continue to troublesome individuals.

Last year, the CFPB noted that medical debt disproportionately affects low-income families and communities of color, perpetuating the racial wealth gap and hurting their relationship with the healthcare system.

The CFPB analysis also noted the difficulty individuals have in disputing medical collections and ultimately having them removed from their reports on their own.

“It’s an effort to take off things that were wrongly hurting people’s scores,” said Ted Rossman, senior industry analyst at Bankrate. “It’s possible that this debt someone is being accused of failing to pay didn’t even belong to them – it was the insurance company’s responsibility, or perhaps even a billing error.”

That’s why some lawmakers say the partial removal falls short by leaving those larger-dollar collections accounts on people’s reports.

“If you have $1,000 in medical debt, you’re no less credit-worthy than someone with $500,” said Senator Sherrod Brown (D-OH), Chair of the Senate Banking, Housing, and Urban Affairs Committee. “It stems from the same problem – someone in your family or you got sick… No one should have their financial future destroyed because of a medical emergency or a sick family member.”

This article first appeared on Yahoo! Finance.

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