Are consumers’ credit scores unfairly dinged by medical debt?
The Consumer Financial Protection Bureau thinks so.
Credit scores, generated by information in credit reports, are three-digit numbers that try to predict a consumer’s likelihood of paying bills. The higher the number, the better. Businesses use scores to decide whether to extend credit and at what interest rate. Scores fall when unpaid debt goes to collections, which means consumers can end up paying more for credit cards and mortgages.
The CFPB looked at 5 million anonymous credit reports from 2011 along with the consumers’ loan repayment patterns over the subsequent two years. Then, comparing credit scores of those with and without medical debt in collections, the agency found that consumers with such debt had scores that were 10 points less than they should have been.
Credit scores also traditionally have underestimated consumers’ creditworthiness – by as much as 22 points – by not factoring in when this medical debt has been repaid, the agency says.
That 10- to 22-point difference can cost consumers tens of thousands of dollars on mortgages or other big loans, the CFPB says.
More than half of debt collections on credit reports involve medical bills. The CFPB says it looked at this issue because of consumer complaints.
The medical billing process is complicated. Errors can occur. Sometimes patients conclude that their insurance has picked up the tab, only to find out later from a debt collector that this isn’t the case, the CFPB says.
The agency didn’t make recommendations to the industry.
That may be because the two major credit score models – FICO and VantageScore – are already changing the way they consider medical debt collections, says John Ulzheimer, a president of consumer education for CreditSesame.com, a credit information website.
Falling behind on bills for unexpected medical conditions is generally considered less of a credit risk than not paying utility bills or defaulting on credit card debt, he says.
Since updating its score last year, Vantage ignores collections on debt – medical and other types – that has been repaid or settled.
And a FICO score update this summer also will give less weight to medical collections, Ulzheimer says.
“We are reviewing the CFPB’s report in detail and will carefully consider the findings,” Vantage said in a statement. “Our model developers are continually working to create the most predictive model possible to the benefit of all market participants including and especially consumers.”
FICO did not return calls for comment.
“The CFPB validates what FICO and Vantage scores have already done,” Ulzheimer says. “Everyone is singing from the same hymnal, which is uncommon.”
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