What banning medical debt from your credit score actually means

In the final days of its tenure, the Biden administration has banned credit reporting agencies from including medical debts in their reports, aiming to make it easier for people to access credit, including loans and mortgages.

“No one should be denied economic opportunity because they got sick or experienced a medical emergency,” Vice President Kamala Harris said in a White House statement announcing the new rule Tuesday.

The administration first proposed the rule in June of last year, and the Consumer Financial Protection Bureau (CFPB) issued the final ruling today.

The new rule is part of a constellation of federal, state, and local strategies, stretching back to the Obama administration, to reduce the burden of medical debt on Americans. Advocates hail the change as an important step, but its effects may not be as significant as the administration hopes. And with Republicans already speaking out against it, it’s possible the rule might be reversed or not enforced at all.

How the ban — and medical debt reporting — works

It’s up to individual medical providers whether they report debt to credit agencies. The information in that report is then used to calculate a person’s credit score, which helps lenders like banks determine how likely a person is to pay off debt they accrue. The idea to remove medical debt from credit reports isn’t new. In 2023, major companies like TransUnion, Experian, and Equifax stopped including medical debt under $500 in their credit reports.

The new rule “will remove an estimated $49 billion in medical bills from the credit reports of about 15 million Americans,” according to the CFPB. The CFPB claims that medical debt isn’t actually a very good predictor of a person’s overall creditworthiness, and that “consumers frequently report receiving inaccurate bills or being asked to pay bills that should have been covered by insurance or financial assistance programs.”

The new rule only addresses medical debt when it has already gone into collections, Stanford University economics professor Neale Mahoney explained. “You can basically either address medical debt at the source, like right after hospitalization, or you can sort of address things downstream,” like the new rule, he said. Other downstream interventions include retiring medical debt, as some municipalities have done.

The change can improve people’s financial situations, according to Francis Wong, an economist at the Ludwig Maximilian University of Munich.

“Our research indicates that people are better off, in the sense that having medical debt removed from their credit reports leads to meaningful increases in credit scores, especially for those who do not show signs of financial distress outside of their medical debt,” Wong wrote in an email.

As part of the broader landscape of medical debt interventions, the new rule is an important tool because it could encourage people to continue seeking medical care, according to Eva Marie Stahl, vice president of programs and policy at Undue Medical Debt, an organization that helps pay off medical debt and advises on policy solutions to medical debt.

“In some cases, [reported medical debt] could prevent somebody from accessing work or a place to live,” Stahl said. “It’s top of mind for people when they access health care. So we’re hoping that people are just sort of breathing a sigh of relief today and thinking a little bit differently about how they engage with the health system, so that they’re putting their health care needs first.”

Will the new policy make a difference?

However, Wong and Mahoney, who worked together on a research paper about paying off medical debt, also cautioned how the new rule will impact people’s financial situations.

The change will be most significant for people who don’t carry much other debt, according to Mahoney. “There are people who have otherwise good credit except for medical debt and collections, and so for those folks you see, I think, meaningful increases in credit scores,” Mahoney told Vox. This might look like an increase of 14 points on average and an increase of $900 in credit limits, which is not insignificant.

Simply leaving medical debt off credit reports doesn’t address the broader problem of continued medical debt. “Those who owe medical debt may be grappling with ongoing issues associated with the original medical event, such as poor health and inability to work,” Wong wrote. For many people, it also probably won’t mean the difference between getting a home loan and being denied, he said. “Although removing medical debt from credit reports is likely to increase access to credit card borrowing, the same may not be true for access to mortgages, given that few people with medical debt may be in a position to afford a mortgage.”

Ultimately, the debt still exists, whether or not it shows up on a credit report, and it impacts people’s finances and their ability to access medical care.

Then there’s the possibility that whatever relief the rule brings to people in debt will not last. Republicans in Congress have already spoken out against the rule, both from a policy perspective and as part of an effort to curtail the CFPB’s regulatory agenda.

In an August memo to CFPB Director Rohit Chopra, members of the House Committee on Financial Services wrote that “restricting inclusion of medical debt in credit reports and scores will undermine underwriting processes and increase risk in the financial system, to the detriment of consumers,” and argued that the rule would have “significant negative effects on access and affordability of credit for all consumers, and particularly for low-income borrowers.”

Banking industry lobbying groups, like the Bank Policy Institute and the Consumer Bankers Association, urged Chopra to withdraw the rule, saying that it would actually make credit more expensive because it would be riskier and more scarce if access improved. The groups also pushed back against the common argument that medical debt, as a product of circumstances beyond people’s control, is different from other kinds of debt related to a lack of financial knowledge or adequate planning.

A Republican Congress might not have the votes to roll back the new rule. But the CFPB will change dramatically under the incoming Trump administration, and leadership may not enforce the medical debt credit reporting ban or the other protections the agency has put in place in the last months of the Biden administration.