Equifax, Experian and TransUnion to begin changing how medical debt collections are reported
Credit reporting goliaths Equifax, Experian and TransUnion reported last Friday that beginning this summer they will soon delete as much as 70% of all derogatory credit reporting related to medical debts. For anyone in the consumer lending world who has paid attention, these types of collection accounts account for the majority of all.
The big three reporting agencies advised the changes would eliminate up to 70 percent of the medical debt accounts on consumers’ credit reports, which contain reams of data used to calculate FICO scores, which are critical to consumer access to auto loans, credit cards, mortgages, rental agreements and more.
Beginning July 1st, medical debts that were paid after they went to collections will no longer appear on consumers’ credit reports. Previously, they lingered for up to seven years.
New unpaid medical debts will now only appear after a full year of assignment to a collections agency instead of the current six month period which is intended to provide consumers more time to address the debt with their insurance companies and health care providers, which are most often the source of these debts through underpaid or denied claims.
Most dramatic, beginning in the first half of 2023, they will exclude unpaid medical collection debts under $500. This is huge in that, if you’ve spent a lot of time reviewing credit reports, the vast majority of medical collections are small balances, sometimes reported multiple times over the same unpaid claim.
“As an industry we remain committed to helping drive fair and affordable access to credit for all consumers,” the companies’ chief executives said in a statement.
Already, some changes have been taken in the Fair Isaacs (FICO) formulas used to develop credit scores that reduce the negative ramifications of medical debts, but older FICO models are still widely in circulation. As such, many consumers have not yet felt the improvement to their scores.
And the three companies’ changes do go a bit further — for example, they will expunge more unpaid medical debts — while reducing the negative information flowing into the calculations of lenders that haven’t adopted the latest formulas.
“This is huge, no doubt about it,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center, “and it helps those people who have medical debt due to things like co-pays and deductibles, which is usually under $500.”
But the changes will do little to lift the scores of people with the largest unpaid debts, who are often dealing with catastrophic or costly illnesses that result in high bills even with insurance coverage.
“It is the sickest and poorest, the most vulnerable, who are the 30 percent,” Ms. Wu added, referring to the portion of unpaid medical debt accounts that will remain on credit reports.
FICO, the most widely used credit score, baked in changes to ignore paid debts and to weigh certain unpaid medical collections less heavily starting in 2014 with its FICO 9 formula. It found that ignoring collection accounts — medical or otherwise — that had been paid would actually improve its score’s accuracy, so it eliminated them entirely.
It also found that people with unpaid medical collections were less risky than those with other types of unpaid collections, so it factored in that information as well. But people with any unpaid accounts (including medical) were still riskier than those with none at all, so it did not go as far as eliminating medical debt from its algorithm altogether.
VantageScore, FICO’s main competitor, made similar changes to its formula even earlier. It eliminated all paid collections, including medical debt, with a scoring model introduced in 2013.
Ethan Dornhelm, FICO’s vice president of scores and predictive analytics, said the company was working with the credit-reporting companies to quantify how the changes may shift scores — and how many people will be affected. He said he believed the changes would have a similar effect as when the reporting companies eliminated two other sources of negative information: tax liens and civil judgments. Those affected generally saw their scores rise by 20 points or less, he said.
Source: NY Times
Massive changes coming to credit reporting! – Fair Debt Collection Practices Act – FDCPA Source: NY Times
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