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70% of medical collection debt will soon be removed from credit reports—and it could boost your credit score

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The three major credit reporting agencies announced Friday that they will strip 70% of medical debt information out of consumers' credit reports, starting July 2022.

The bureaus — Equifax, TransUnion and Experian — say that medical collection debt will no longer appear on credit reports if that debt has already been paid. The agencies are also increasing how long it takes for that debt to appear on a consumer's report, from six months to one year. And starting sometime in "first half of next year," they will also remove unpaid medical collection debt from reports if it's less than $500.

One of the agencies' regulators, the Consumer Financial Protection Bureau (CFPB), had been considering a ban on medical debt before these changes were announced.

As of the second quarter of 2021, 58% of bills that were in collections and on people's credit records were medical bills, according to a recently published CFPB report on medical debt. But the report also found that medical debt collections were "less predictive of future payment problems than other debt collections," like mortgages or car loans.

Nearly 1 in 10 Americans carry medical debt over $250, according to a recent Kaiser Family Foundation study. And people of color are disproportionately affected by medical collection debt, a recent National Consumer Law Center report found.

How these changes will affect your credit score

Medical debt is not included as part of your credit report if it remains with your original service provider, but once it goes to collections it likely affects your credit score. These debts can linger on your credit report for up to seven years, although the new rule will now remove them if they are paid off.

An instance of collection debt in your credit report can decrease your credit score by as much as 110 points. Your credit score is what lenders use to determine whether you'll qualify for loans, as well as the rate of interest on those loans.

Already, some of the newer FICO and VantageScore algorithms disregard paid medical collections and place a lower emphasis on unpaid medical debt compared to other types of debt, Ted Rossman, a senior industry analyst at Bankrate, said in a statement.

"The CFPB has been poking around this issue even further, and that seems to have encouraged the credit bureaus to completely remove paid medical collections from all credit reports," said Rossman.

This removal will help people who have paid medical collection debt increase their credit scores, especially for older FICO models that are required for federally-backed mortgages, he added.

"There seems to be an acknowledgment that medical care is essential and should not be penalized by the credit bureaus," Rossman said.

Don't miss: Over half of Americans have medical debt, even those with health insurance—here’s why

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