The Key to Better Credit Scores? Erasing Medical Debt

Millions of Americans have medical debt. A new proposal could remove it from credit reports and boost scores.

Oct 26, 2023

pexels-ketut-subiyanto-4560083 — Ketut Subiyanto // Pexels

by Bria Overs, Word in Black

The negative impacts of medical debt on Americans could soon cease if the Biden-Harris administration succeeds in scrubbing medical bills from credit scores and reports.

In September, Vice President Kamala Harris and the Consumer Financial Protection Bureau (CFPB) publicized they were starting the rulemaking process to have medical bills removed from credit reports. The CFPB is a government agency that protects consumers from predatory and abusive banks, lenders, and other financial institutions.

The Centers for Disease Control and Prevention (CDC) analyzed data from 2021 and found that 15.8% of Black American families struggled to pay medical bills. And middle-class families are hit hardest when it comes to medical debt, a study from Third Way, a center-left policy think tank, reported. An estimated 4 million middle-class Black Americans have financial medical obligations.

“You could be good on your mortgage, you could be making your credit card payments on time, but as soon as this massive amount of medical debt made it to your credit reports, it was like destruction,” says Netiva Heard, credit counselor at The Frugal CrediTnista.

The CFPB is considering proposals to end coercive debt collection practices, clean up inaccurate data, and improve credit scores. Removing some medical debt could significantly improve Black Americans’ ability to secure auto loans and mortgages, making them eligible for more favorable loan terms.

“Research shows that medical bills have little predictive value in credit decisions, yet tens of millions of American households are dealing with medical debt on their credit reports,” said CFPB Director Rohit Chopra in a statement. “When someone gets sick, they should be able to focus on getting better, rather than fighting debt collectors trying to extort them into paying bills they may not even owe.”

How Debt Affects Credit Scores

A credit score is “a prediction of your credit behavior,” according to the CFPB. It provides companies a snapshot of how reliable a person will be in paying a loan back on time and is used to determine interest rates, credit limits, and other terms.

It considers payment history, unpaid debts, number of loans or credit card accounts, length of open credit, credit utilization, number of inquiries, and, importantly, instances of debt sent to collections, foreclosures, and bankruptcy.

“It is just an easy way for a company to be able to say, ‘What is the risk of doing business with this person?’” Heard says.

In a post about Black women’s economic well-being, the Urban Institute offered policy solutions for closing the racial and gender wealth gap, which included canceling medical debt. These costly bills will “erode” most of Black women’s accumulated wealth with generational impacts.

“When you look at differences in debt by race, the big difference really is unsecured debt,” Ofronama Bui, senior research associate at the Urban Institute, tells Word In Black. “It is not necessarily even credit card debt or things like that. It’s debt like medical or student loans where Black people [owe more].”

Health Outcomes Cause Medical Debt

Bui points to the chronic and severe health conditions Black people are disproportionately afflicted with for those large balances. Research shows that racism, regardless of income levels, affects health outcomes for Black communities, she says.

“I think something that contributes to that is the employment issue,” Bui says. “It is, in fact, the case that Black folks, both women and men, have less health insurance, especially when it comes to employer-sponsored health insurance rates.”

An interest in this issue at the federal level started in April 2022, when Harris announced the administration would look into medical debt relief initiatives. “No one in our nation should have to go bankrupt just to get the health care they need,” she said during a press conference in April.

Harris said the bureau would launch a public education campaign on consumer rights around medical debt, adding that the administration would take action against “the bad actors” who violate those rights, force people to pay their debts, or harass consumers.

“Folks need to have the rights,” she said. “And if they’re not there, let’s put them into law, and let’s also make sure their rights are protected and that they are informed of their rights.”

If the administration’s debt removal proposal is approved, it should go into effect at some point next year. In a conference call with the press, Harris said the new rule will improve the credit scores for millions of Americans.

“Once this rule is final, it will mean, one, that consumer credit reports will not include medical debt and, two, that creditors will not be able to use medical debt to determine a person’s eligibility for credit,” Harris said.