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Medical debt may come off credit reports soon, helping Americans qualify for more financial products

The CFPB wants to remove medical debt from the credit reports of millions of Americans. (iStock)

Medical expenses may soon be removed from many credit reports, the Consumer Financial Protection Bureau (CFPB) said. Proposed the rule The bill aims to remove medical debt from credit reports and prevent debt collectors from using the reporting system to coerce people into paying.

The rule is also intended to provide greater privacy for individuals with medical debt and increase loan approvals. Previously, credit reporting agencies could share medical debt with lenders, who could then factor it into their lending decisions. This led to a long string of denials for borrowers with high medical debt that many consumers had no control over.

“The CFPB is working to end the nonsensical practice of weaponizing the credit reporting system to trick patients into paying medical bills they don’t need to pay,” said CFPB Director Rohit Chopra. “Medical bills reported on credit reports are too often inaccurate and have little to no predictive value regarding the repayment of other loans.”

In 2003, Congress Fair and Accurate Credit Transactions Act This was supposed to limit lenders’ use of medical debt information, but it created a loophole that allowed lenders to use medical debt when making lending decisions.

This new rule would essentially close that loophole and help wipe medical debt from millions of credit reports.

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Medical debt is not an indication of your ability to repay other loans.

Before proposing the new rules, the CFPB conducted research and found that medical expenses and other loan repayments on an individual’s credit report don’t correlate. In fact, the opposite is true: medical debt often leads to less accurate lending.

Removing medical debt from credit reports would likely benefit both lenders and borrowers: It would likely increase the number of loan application approvals. The CFPB projects that approximately 22,000 mortgage applications would be approved each year if the new rules pass. Although all three credit reporting agencies, Equifax, Experian, and TransUnion, are attempting to remove medical debt from credit reports, 15 million Americans still have $49 billion in unpaid medical bills on their reports.

Many consumers are not even aware that they have certain medical debt on their credit reports. Debt collectors often engage in “debt parking,” purchasing medical debt and then listing it on consumer credit reports. The proposed rule would eliminate this practice.

Lawmakers like Sen. Bernie Sanders support the rule, arguing that huge medical debt is the root cause of the current suffering of many Americans.

“It is immoral that families are being evicted, their heat shut off and their wages garnished because of medical debt while the health care industry made more than $100 billion in profits last year.” Sanders said: On social media.

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Consumers choose to “buy now, pay later” to avoid damaging their credit scores

As consumers look to protect their credit scores, they are reluctant to take on the debt necessary for big purchases. Buy now, pay later (BNPL) options are growing in popularity because they don’t necessarily require a credit check. PYMNTS Survey found.

More than 19% of BNPL customers chose to use the BNPL option because these companies often don’t conduct hard credit checks when approving applicants. Nearly a third of BNPL users surveyed cited improving their credit score as a motivation for using these apps, despite the fact that many BNPL transactions don’t directly impact credit score models.

Beyond the impact on credit, the main reasons consumers turn to BNPL apps are: Over 50% of respondents to a PYMNTS survey cited being able to manage their cash flow more effectively as the top reason for choosing a BNPL option, with an additional 18% acknowledging that cash flow management is an important factor, but not the main reason.

Getting out of debt can be difficult, but with a debt consolidation loan, you can lower your interest rate and consolidate your debt payments into one monthly payment. To take advantage of these benefits, visit Credible today to apply for a debt consolidation loan.

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Do you have a finance-related question but don’t know who to ask? Email a trusted money expert email address: Your question might be answered in Credible’s Money Expert column.

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