Medical debt will soon be banned on credit reports

Key Takeaways:

• The Biden administration is finalizing a rule to eliminate medical debt from credit reports.
• An estimated $49 billion in medical bills will be removed from the credit reports of about 15 million people.
• Lenders will be banned from using certain medical information in loan decisions.
• The rule is expected to boost credit scores by an average of 20 points for those affected.
• An additional 22,000 mortgages are expected to be approved each year as a result.

Medical Debt No Longer Impacting Credit Scores Under New Rule

Americans burdened by medical debt will soon find relief as the Biden administration finalizes a rule to remove such debt from credit reports. The Consumer Financial Protection Bureau (CFPB) announced on Tuesday that the rule will eliminate an estimated $49 billion in medical bills from the credit reports of about 15 million people .

“People who get sick shouldn’t have their financial future upended,” said Rohit Chopra, the CFPB’s director. “The CFPB’s final rule will close a special carveout that has allowed debt collectors to abuse the credit reporting system to coerce people into paying medical bills they may not even owe.”

A Significant Boost to Credit Scores

The new measure is set to provide an average 20-point increase in credit scores for those with medical debt on their reports, according to the CFPB. This improvement is expected to lead to the approval of approximately 22,000 additional mortgages every year , opening doors to homeownership for many Americans previously hindered by medical debt.

“This will be life-changing for millions of families, making it easier for them to be approved for a car loan, a home loan, or a small-business loan,” Vice President Kamala Harris stated in a fact sheet.

Protecting Consumers in Lending Decisions

Beyond removing medical debt from credit reports, the rule bans lenders from using certain medical information in loan decisions. Lenders will no longer be able to use medical devices, such as wheelchairs or prosthetic limbs, as collateral for loans or repossess these devices if patients are unable to repay.

However, lenders can continue to consider medical information in specific situations, including when a consumer requests a loan to pay health expenses or seeks a temporary postponement of loan payments for medical reasons.

State and Local Efforts to Eliminate Medical Debt

In conjunction with federal actions, states, counties, and cities are taking steps to alleviate medical debt burdens. Harris announced that government entities have eliminated more than $1 billion in medical debt for over 750,000 Americans using funding from the 2021 American Rescue Plan Act. By the end of next year, states and municipalities are projected to wipe out an estimated $7 billion in medical debt for nearly 3 million Americans .

North Carolina, for instance, has established a medical debt relief program wherein 99 eligible hospitals have pledged to eliminate up to $4 billion in unpaid bills for low- and middle-income residents. In exchange, participating hospitals become eligible for enhanced Medicaid reimbursements.

Addressing a Widespread Problem

Medical debt has long been a significant burden for Americans and has become the most common collection item on credit reports . The CFPB’s research indicates that medical debt on credit reports is not a reliable predictor of a person’s ability to repay other loans. Additionally, healthcare bills often contain errors, leading to prolonged disputes among patients, insurers, and providers.

By removing medical debt from credit reports and restricting its use in lending decisions, the new rule aims to prevent illnesses from causing long-term financial harm. As Chopra noted, the rule seeks to ensure that getting sick does not upend an individual’s financial future.