People’s credit scores may be negatively impacted by medical collections that they aren’t even aware of, according a study by the Consumer Financial Protection Bureau (CFPB).
That’s just one of the problems revealed by the study, which looked at 5 million credit reports between September 2011 and September 2013. Analysts examined credit histories and scores in relation to consumers’ actual payment patterns over the course of two years to determine whether their credit scores were reliable predictors of repayment.
Researchers found that medical debt that had gone into collections was responsible for lowering many people’s credit scores even after the debt had been paid. Most medical debt is reported to credit bureaus by third-party collection agencies, and many times consumers don’t know that the debt has been sent to collections. Collection reports remain on credit records and impact credit scores for up to seven years.
Findings indicated that, in general, having medical debt in collections did not correlate with not repaying other types of debt. Consumers who had medical debt on their credit reports paid their bills at the same rate as people whose credit scores were ten points higher. And people who had repaid medical debt that had been in collections paid back debt at a rate consistent with consumers with credit scores 16 to 22 points higher.
The study concluded that a poor credit score due to negative information from medical collections does not paint an accurate picture of consumer behavior.
No differentiation between medical and other debt
Although medical debt is different than other types of debt, credit scoring models do not differentiate between unpaid debts in collections. The result is that credit scores weighed down by medical debt are not precise indicators of whether or not someone will keep up to date on credit card payments, rent, utility or other bills.
Sometimes medical debt is sent to collections as a result of problems with insurance companies or medical provider billing processes. When that happens, it can result in an unpleasant surprise when folks check their credit reports. The CFPB said they receive many complaints from people who didn’t know they had medical debt in collections until they found it on their credit report or got a call from a collections agency.
Richard Cordray, director of the CFPB, urged credit bureaus to change their scoring methods to take into account differences between medical debt and other consumer debt. “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,” he said.