MATIASGUARRO

Americans will no longer have to decide what’s more important: Their health or their credit score.

Finalized on January 7, a new rule from the Consumer Financial Protection Bureau (CFPB) prohibits credit reporting agencies from including medical debt information in the credit reports and scores they provide to lenders. It’s expected to impact nearly 15 million Americans who have previously been haunted by an estimated $49 billion in medical bills on their credit reports.

The amount of debt on your credit report is a key signal to potential lenders of your ability to repay any new loans, such as mortgages, credit cards or auto loans. Prior to this new CFPB rule, medical debt, like other types of consumer debt, counted toward your overall debt load, which could have made it harder to qualify for approval for new loans or good rates on the loans you do qualify for.

The new rule follows recent policy changes by the three major credit report bureaus—Equifax, Experian and TransUnion—to exclude medical debt under $500 on consumer credit reports.

“Someone’s history of unexpected medical debt has no correlation with their willingness or ability to repay future bills, so it should have no bearing on a person’s access to credit, an apartment or a job,” said Ruth Susswein, director of consumer protection at Consumer Action, a consumer rights and protection nonprofit, in a statement.

The new rule will go into effect 60 days after publication in the Federal Register. It typically takes about three business days for a new document to be added into the Federal Register, which effectively serves as official notice of the rule. So, don’t expect your credit score to improve overnight; it will be several weeks before affected consumers will see the changes.

Addition by Subtraction

CFPB research has shown that medical debts aren’t an accurate measure of a potential borrower’s ability to repay other debts, and the number of incorrect medical bills is staggering.

In 2023, the CFPB logged thousands of consumer complaints about debt collections, with 11% pertaining to medical debt. Common complaints included inaccurate medical bills or being asked to pay bills that should’ve been covered by insurance or financial assistance programs. As a result, the incorrect information often led to negative marks on consumer credit that were error-based rather than true overdue or unpaid accounts.

The anticipated effect of removing medical debt from credit reports is twofold. First, by not receiving this information, potential lenders can no longer include medical debt when assessing loan applications. Second, by excluding these debts from consumer credit reports, the CFPB predicts it could give those previously affected an average credit score increase of 20 points.

“Medical debt is excruciatingly painful in and of itself. Consumers then often have to face another layer of pain when it slashes their credit scores,” says Bobbi Rebell, CFP and CEO of Financial Wellness Strategies, which provides financial wellness workshops to companies. “While this ruling doesn’t take away the actual medical debt, it does take away the second layer of pain, and the snowball impact it can have.”

The CFPB also estimates the anticipated credit score improvements have the potential to lead to additional approvals for 22,000 affordable mortgages every year, a life-changing opportunity for those who were previously denied a home loan due to their reported medical bills.

“Medical debt is the largest source of debt collections,” says Leslie Tayne, attorney, debt and credit expert. “This [rule] can give patients peace of mind, knowing that their finances won’t be impacted although they are sick.”

How to Check For—and Correct—Medical Debt on Your Credit Report

There’s no action required on your part to make sure the medical debt is removed from your credit report, and the credit bureaus are required to remove the medical debts by the 60-day post-publication date.

Be sure to closely monitor your credit reports once the rule is officially implemented. If you believe your score continues to be negatively affected by medical debt even after the rule is in effect, there are steps you can take.

1. Access your credit report for free.

First, check your credit reports at annualcreditreport.com, the only site that allows free reports under federal law. In spite of the “annual” in the site name, the law changed post-Covid to allow one free copy of your credit report online each week from each of the three main consumer credit reporting bureaus–Experian, Equifax and TransUnion. Checking each of these reports regularly can help you flag errors that could be dragging down your score, medical debt or otherwise.

2. File a claim with the credit reporting bureau.

If you do spot an error, you can file a claim with the bureau reporting the incorrect information using the Federal Trade Commission’s template. By law, the bureau has 30 days to investigate your claim and respond to you in writing. If a correction needs to be made, the bureau has to notify anyone who received a copy of your credit report within the last six months that a correction has been made, if you ask.

3. Tackle the problem.

It’s important to keep in mind the rule doesn’t eliminate the medical debt itself, just the record of it on your credit report. Even once the debt has been removed from your credit report, if you are liable for the medical bills and it’s not the result of a billing, insurance or communications error, you’re still liable for payment.

Make a plan to pay down the debt. Even though it’s not on your credit report, carrying any kind of debt can be costly and stressful. If you need extra time to pay it off, consider a balance transfer card with a 0% APR offer to buy you time to make payments without incurring additional interest. If the debt burden feels overwhelming, some hospitals offer financial assistance programs that may be able to help.