New rule would eliminate medical debt from credit reports

A new proposal by the Biden administration would protect Americans from having their credit history cratered by medical bills.

The rule change, announced by the Consumer Financial Protection Bureau (CFPB) on June 11, would prevent almost any medical debt from appearing on credit reports. In a statement, the CFPB said medical bills "have little to no predictive value when it comes to repaying other loans."

In 2022, the three largest credit bureaus —  TransUnion, Equifax and Experian — started removing paid medical debts from consumers' credit reports. The following year, they stopped including outstanding balances under $500.

FICO® and VantageScore, the two major credit scoring companies, have also decreased the degree to which medical bills impact credit scores.

Medical debt can still have significant financial consequences, though, leaving you with fewer options for housing, loans and credit cards. 

According to the CFPB, approximately 15 million Americans are saddled with medical debt, which has reached $49 billion.

Even if you have medical insurance, there are deductibles to meet and copays that need to be covered. In addition, there may be a maximum amount your provider is willing to pay for treatment.  

After your health insurance company covers its share, your medical provider will bill you for whatever is left. They may attempt to collect payment through phone calls or letters.

If you still haven't paid the bill after several months, the debt may be sold to a medical collections agency, which will try to collect on it.  

Medical debt is not reported to credit bureaus as long as it remains with your healthcare provider. If you don't pay the bill for at least three months, however, your provider may sell it to a collections agency. That's when it can ding your credit score.

Unpaid medical debt that is in collections can be reported to credit bureaus after one year. At that point, it remains on your credit report for seven years, the same as any other kind of debt.

As of 2023, medical debt can only impact your credit score if it's over $500. If the CFPB proposal is approved, however, no medical debt — no matter how large — would appear on your credit report.

According to the CFPB, the proposed rule would help ensure medical information does not unfairly damage credit scores. It finalized, it would:

• Remove exceptions that let lenders use information about medical debt to make determinations about someone's creditworthiness.
• Prohibit credit reporting agencies from including medical debt on credit reports sent to creditors if the creditor is prohibited from considering it.
• Bar lenders from using medical devices like wheelchairs and prosthetic limbs as collateral for loans or from repossessing them if someone can't repay the loan.

Even if the rule is approved, it's not expected to take effect before 2025. If you're mired in medical bills and want to address them now, you have several options. 

Negotiate with your healthcare provider

"Providers are more than willing to settle on these things," healthcare reform advocate Jeff Smedsrud told CNBC Select. "They're willing to get paid something, rather than nothing. Give them a call, review the charges together and try to negotiate a deal. It could be a lower lump-sum payment or even a payment plan with no interest." 

Talk to an advocacy group or government agency

Organizations like Undue Medical Debt and the Patient Advocate Foundation work with individuals to pay off medical debts. If you qualify for Medicaid, you may be able to have medical bills covered retroactively. 

Apply for a 0% APR credit card

If your credit score hasn't been severely damaged yet, you may qualify for a credit card with a zero-interest introductory offer. That would give you more time to pay off the balance without interest, and you might earn some credit card rewards along the way.

The Wells Fargo Active Cash® Card has 0% intro APR for 15 months from account opening on purchases and qualifying balance transfers. (After that, it's a variable APR of 20.24%, 25.24% or 29.99%). There's a 3% intro balance transfer for 120 days from account opening then the fee is up to 5%, min $5. There's no annual fee and cardholders earn 2% cash rewards on purchases.

Consider debt consolidation or debt settlement

If you want to tackle an outstanding medical bill, a debt consolidation loan would let you pay it off at a more reasonable pace and help repair damage to your credit score. Upstart will work with borrowers with little or no credit, considering other factors like your education and work experience. Funds may be available as quickly as the next business day and there's no penalty for paying off the loan early.

If a loan isn't an option, debt settlement companies can negotiate with creditors to get your balance reduced. In return, they collect a fee that can be as much as 25% of your total debt.

Accredited Debt Relief claims it can significantly reduce your monthly payments and get you debt-free in as little as two years. It received an A+ rating from the Better Business Bureau and has worked with over 300,000 clients to resolve more than $3 billion in debt.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Jeff Smedsrud,  cofounder of the insurance marketplace HealthCare.com and a board member of the nonprofit Undue Medical Debt, which is focused on the elimination of personal medical debt.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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