Florida Mortgage Trends

MAY 20, 2014

Consumers with medical bills in collection can see their credit scores hit by as much as 22 points compared to those with other types of debt, according to a study released by the Consumer Financial Protection Bureau also known as the CFPB.

The CFPB said that current credit scoring models were hurting people with medical debt because the medical debt did not differentiate between medical versus non-medical debts nor paid versus unpaid medical bills when in collection.

As a result, the CFPB is urging companies that use credit scoring models to treat medical debt differently than other debt.  "For consumers with lower scores, such as those on the brink of being classed as subprime, these differences can be more significant," said CFPB Director Richard Cordray in a call with reporters Tuesday. "They may cause consumers to be denied a loan altogether or they could cost tens of thousands of dollars over the life of a home mortgage."

The study found that models were ranking consumers with medical debt 10 points lower than those with other outstanding debts like utility and cell phone bills. It was worse for consumers who paid back their medical bills in collection, as they faced a median 16-to 22-point lower credit scoring even though they were less likely to be delinquent than other consumers with the same score. 

CFPB officials argue that medical debt should be treated differently because that type of debt is usually unplanned and consumers are often unaware of amounts owed until after treatment.

"When you take out a loan, typically you know how much you will owe and the interest rate you will be charged up front. But with medical costs, you have less visibility," Cordray said. "Complaints to the bureau indicate that many consumers do not even know they have a medical debt in collection until they get a call from a debt collector or they discover the debt on their credit report."

"The CFPB research underscores the urgency for Congress to pass the Medical Debt Responsibility Act, which would require that paid or settled medical debt be removed from a consumer's credit reports."

"Given its enormity, given its influence over people's lives, and given its broad impact on our overall economy, there is undeniably much at stake in ensuring that credit reports and credit scores are working properly for both consumers and creditors," Cordray said. "Careful and accurate treatment of medical debt is deserving of greater attention."