Personal Finance

Some medical debt will continue to haunt consumers despite moves by White House and credit bureaus

Key Points
  • The Biden administration said Monday it is taking steps to help limit the impact that unpaid medical debt has on consumers.
  • The plan comes several weeks after the three biggest credit reporting firms announced they will soon limit the inclusion of such debt on credit reports.
  • Nevertheless, roughly 30% of medical debt will continue to reach credit reports.
Jose Luis Pelaez Inc | DigitalVision | Getty Images

Medical debt has a big bull's-eye on its back.

In addition to the March announcement by the three big credit-reporting firms that they will limit when such debt ends up on credit reports, the White House on Monday outlined steps intended to further prevent past medical bills from haunting consumers.

Yet not everyone will see relief.

"What's been done so far are huge developments and will help consumers," said Chi Chi Wu, staff attorney at the National Consumer Law Center. "We do think more could be done."

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Medical debt in the U.S. has reached roughly $88 billion, according to the Consumer Financial Protection Bureau. Additionally, 58% of bills that are in collections and appear on credit reports are medical-related, and roughly 43 million credit reports show such collections.

This can lower your credit score, which makes it harder to secure loans or other credit, or get favorable interest rates if you are approved.

While some credit scores don't treat medical debt as harshly as others do, lenders tend to use one that treats all debt in collections the same if it appears on your credit report. Additionally, employers or landlords may use either your credit score or report to make decisions.

At the same time, research has shown that medical debt is less predictive of a person's ability to keep up with payments than other types of collection accounts.

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Included in the Biden administration's announcement is a plan for low-income veterans to have their medical debt eliminated, as well as a push for all federal agencies that make loans to stop considering such debt in determining a consumer's creditworthiness. 

Meanwhile, the three large credit bureaus — Equifax, Experian and TransUnion — said in mid-March that starting July 1, they will stop including medical debt that went to collections on credit reports after it's paid off. Under current practice, it can remain on your record for seven years.

Additionally, consumers will get a year, up from six months, before unpaid medical debt appears on credit reports once it goes to a collection agency. And in the first half of 2023, the credit bureaus will stop including anything that is less than $500.

While the credit agencies say those moves will eliminate roughly 70% of medical debt from credit reports, the remaining share is concerning, Wu said.

"That 30% is definitely a big problem," Wu said. "The folks who own the bigger bills are the people with, maybe, cancer or long Covid, or they're uninsured or underinsured and something catastrophic happens."

About 11 million Americans have medical debt above $2,000, and 3 million owe more than $10,000, according to the White House.

The CFPB also has medical debt in its crosshairs. In addition to its plans to target credit reporting practices that violate consumer rights, the watchdog agency also is examining whether medical billing data should be included in credit reports at all.

Additionally, there are various bills in Congress that address the issue. One proposal is to prohibit the inclusion of "medically necessary" debt. Generally speaking, this would mean unpaid bills for elective procedures or services — i.e., cosmetic surgery — would still show up on credit reports if above $500.