Medical debt may come off credit reports soon, helping Americans qualify for more financial products
Consumers often turn to buy now, pay later options to protect their credit scores
The CFPB wants to eliminate medical debt on credit reports of millions of Americans. (iStock)
Medical bills may soon be removed from many credit reports. The Consumer Financial Protection Bureau (CFPB) just proposed a rule that would eliminate medical debt from credit reports in an attempt to prevent debt collectors from using the reporting system to get people to pay.
The rule also intends to create higher levels of privacy for individuals with medical debt and increase the number of loan approvals. In the past, credit reporting companies could share medical debt with lenders, who would consider these debts in their lending decisions. This led to a long list of denials for borrowers facing high levels of medical debt, something many consumers can’t control.
"The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe," Rohit Chopra, CFPB director said. "Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans."
Back in 2003, Congress passed the Fair and Accurate Credit Transaction Act that was supposed to restrict lenders from using medical debt information, but a loophole was put into place that allows creditors to use medical debt when making lending decisions.
The new rule would essentially close that loophole, helping to eliminate medical debt from millions of credit reports.
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Medical debt does not depict a person's ability to repay other loans
The CFPB conducted research before proposing the new rule and found that medical bills on an individual’s credit report don’t correlate with not paying other loans. In fact, the opposite is true. Medical debts often lead to less accurate lending practices.
Medical debt leaving reports is likely to help lenders as well as borrowers. It will likely result in more approved lending applications. If passed, the CFPB predicts the new rule would result in about 22,000 approved mortgage applications each year. All three credit reporting agencies — Equifax, Experian and TransUnion — have attempted to remove medical debt from credit reports, but 15 million Americans still have $49 billion worth of outstanding medical bills listed on their reports.
Many consumers don’t even know they have certain medical debts on their credit reports. Debt collectors often engage in "debt parking," which involves purchasing medical debt and putting it on consumer credit reports. The proposed rule would eliminate this practice.
Senators like Bernie Sanders approve of the rule, citing crippling medical debt as the reason many Americans are currently struggling.
"It is immoral that families are being evicted, having their heat disconnected, or having their wages garnished because of crippling medical debt while the healthcare industry made more than $100 billion in profits last year," said Sanders on social media.
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Consumers opt for buy now, pay later to avoid credit score hits
Consumers are protecting their credit scores but aren’t willing to stop taking on debt they need for major purchases. Buy now, pay later (BNPL) options are growing in popularity, largely because they don’t always run a credit check, a PYMNTS study found.
Over 19% of BNPL customers chose to use BNPL options because these companies often don’t run hard credit checks when approving applicants. Close to one third of BNPL users surveyed also cite improving their credit score as a motivating factor for using these apps, despite the fact that many BNPL transactions don’t directly affect credit scoring models.
Consumers largely turn to BNPL apps for other reasons outside of credit implications. Over 50% of respondents to the PYMNTS study cited managing their cash flow more effectively as the number one reason they choose BNPL options. An additional 18% of respondents acknowledged cash flow management as a significant factor, but not the primary reason.
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