Even if Medical Debt Isn’t on Your Credit Report, It Can Drag Down Your Credit

The Consumer Financial Protection Bureau proposed a new rule on June 11 that would ban unpaid medical debt from appearing on credit reports. The proposal is open to public comment and has not been finalized, though it would likely take effect in 2025.

The rule would aim to close a regulatory loophole that has allowed lenders to take medical debt into account during the loan approval process. The CFPB says the new rule would lead to the approval of about 22,000 more mortgages every year. Credit scores for those with medical debt on their credit reports could rise 20 points, on average, if the rule is finalized.

“I think it does close that gap. And I think it’s definitely the step forward that needed to happen. … This is a key piece of the puzzle,” says Maanasa Kona, an assistant research professor at Georgetown University’s Center on Health Insurance Reforms.

[Read: Best Debt Consolidation Loans.]

What the CFPB Medical Debt Rule Will Do

If the proposed rule is finalized, lenders would no longer be able to:

— Obtain and use medical debt information in credit eligibility determinations

— Take medical devices as collateral for a loan

— Repossess medical devices if a loan cannot be repaid

“For people with unpaid medical debt, it’s helpful in that it it gives them the benefit of being able to be judged by lenders based on the kind of financial decisions they make with regard to opening lines of credit for personal use, rather than expenses derived from potentially critical life or death or quality of life situations when it comes to medical care,” says Bruce McClary, vice president of marketing for the National Foundation for Credit Counseling.

In the past two years, credit bureaus Equifax, Experian and TransUnion stopped medical collections less than $500 and medical debts less than a year old from appearing on credit reports. This helped the share of adults with medical debt on their credit reports drop from 12% to 5% from 2022 to 2023, according to an Urban Institute study.

Even after those changes, the CFPB says 15 million Americans hold $49 billion in medical bills that appear in the credit reporting system.

Breno Braga, a researcher at the Urban Institute and an author of the study, says that the institute will be keeping tabs on credit bureau data.

“We’ll follow consumers over time and see with implementation of the new ruling how that’s going to affect their access to credit,” Braga says. “Are they going to be more likely to get a mortgage approved? Are they going to be more likely to get a credit card approved?”

Braga also says that without a credit score to impact, creditors could become more aggressive in pursuing other measures to compel debt payment, like wage garnishment. “We’ll have to wait and see if that actually happens,” Braga says.

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How Your Credit Score Could Still be Affected

Medical debt may not show up on your credit report in the future, but having too many unpaid debts in other situations can still impact your credit score. If you start ignoring your medical debt, wage garnishment and other legal measures might make paying back your other debts even harder, which can also impact your credit score.

The proposed ruling only applies to medical debt owed to a provider, not a third-party company. According to another 2023 Urban Institute study, 24% of adults with past-due medical bills reported paying some or all of those bills with a credit card and were unable to make subsequent minimum payments.

Credit card debt will continue to remain on your credit reports, and credit cards can often have higher interest rates than original medical debt, Kona says. “Be really, really cautious before putting anything on a credit card,” she says.

But before those debts start to build up, Kona says, “Prevention is always better than cure. Make sure you’re going to your in-network provider, make sure you understand what your financial obligations are going to be. … The onus should not fall on the patient. But right now, in many cases, in many states, it does fall on the patient.”

You do have options when you have unpaid medical debt. You can:

— Negotiate a payment plan.

— Negotiate for reduced payment if you pay in full.

— Research your rights in your state when it comes to wage garnishment and other creditor procedures.

— Learn the regulations on how debt collectors are allowed to contact you.

— Consult legal counsel or a nonprofit credit counseling agency.

[Read: Best 0% APR Credit Cards.]

What Powers Do Hospitals and Creditors Still Have?

Removing medical debt from your credit report doesn’t make it disappear, and citing the possible damage to your credit isn’t the only tool hospitals can use to compel you to pay your debt. Ignoring your medical debt can still lead to wage garnishment, where some of your earnings can be legally withheld for debt payments.

Kona says that the CFPB ruling won’t prevent a lien from being placed on your home, the foreclosure of your home, snowballing interest rates or contact from collections. These policies can differ among states.

It’s important to be proactive in dealing with your medical debt, even if it won’t appear on your credit report.

“I would stress under these circumstances is that, if at all possible, you want to make sure that you that you keep these debts from going to court, and so that you have a little bit more control over the circumstances surrounding how these debts are going to be repaid and what can be negotiated,” McClary says.

The CFPB Proposal Attacks a Symptom, not the Root Cause

The CFPB proposal will not eliminate the underlying medical debt that consumers have.

“Many families do not have the resources to pay to get quality health care,” Braga says. “The fact that there’s a lot of people there with this medical debt in collections is just a symptom of the bigger problem.” While the proposed ruling is a step in the right direction, he says it only attacks the symptoms of medical debt.

The Congressional Budget Office laid out three possible solutions to the root cause of high-cost health care in a 2022 report:

— Capping price growth

— Increasing competition among health care providers with antitrust action

— Promoting price transparency

Vrudhi Raimugia, an assistant research professor at Georgetown’s Center on Health Insurance Reforms, says a more short-term solution would be to make requirements for financial assistance policies easier to meet. “You can’t reduce the price overnight, but at least you can help the consumers who are unable to pay the bills for now,” Raimugia says.

For people who already have unpaid medical debt, the proposed CFPB rule is of little help. The thing to do is take action to reduce your debt burden.

“Time is not your friend, and the sooner you act, the better things are going to be for you,” McClary says. “Get things moving and be proactive and have conversations with those medical billers to put some arrangements in place, arrangements that are realistic and sustainable.”

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Even if Medical Debt Isn’t on Your Credit Report, It Can Drag Down Your Credit originally appeared on usnews.com

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