Getting sick can kill your credit score

Been to the doctor lately? Then you just might have an unpaid medical bill wreaking havoc with your credit score. A study by the Consumer Financial Protection Bureau, feeding off earlier research on past-due debts, found that unpaid medical debts had an unfair impact on consumer credit scores, hitting them harder than they should.

"Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs," said Richard Cordray, director of the CFPB. "Those costs should not be compounded by overly penalizing a consumer's credit score."

Outside of bankruptcy, among the most serious negatives on a consumer credit report is a "collection" account -- a bill that goes so far past due that it gets sent to a professional agency to collect. A landmark Federal Reserve study several years ago discovered that roughly half of all the collection accounts that show up on consumer credit reports were unpaid medical bills.

That makes sense, experts explain, because no one plans to get seriously ill, and the cost of landing in the hospital can be crippling.

However, the most disturbing finding about medical collections is that millions of those listed in consumer credit files came as a shock to the actual consumer. Among those who did know they had medical debts, some said the amount of the bill was in dispute or that they were not liable for paying it because it was supposed to be covered by insurance.

Since then, members of Congress have made several failed attempts to make changes in the way medical debts are reflected in consumer credit files. A bill, perennially dubbed the Medical Debt Responsibility Act, would strike information about past medical debts from consumer credit files within 45 days of them being settled or repaid. This bill, introduced by Los Angeles Democrat Maxine Waters last April, typically languishes in the House Financial Services Committee before dying of old age.


However, this year, the CFPF decided to see whether an outstanding medical debt was indicative of a consumer's inability to pay other bills.

To do this, the CFPB looked at 5 million anonymous credit records over a three-year period. The agency analyzed the records to see how medical debt affected the consumer's credit score and whether consumers with identical credit scores -- but one with medical debt and another without -- were equally likely to default on their other debts. As it happens, consumers with medical debt are better risks.

An outstanding medical debt unfairly penalized the consumer's credit by about 10 points more than it should, according to the CFPB study released Tuesday. A paid-off medical collection account, which remains on the consumer's file for seven years, hit the consumer's credit score by 22 points more than necessary.

The research confirms what advocates have said for years: Medical debts are different and unjustly scar consumer credit, says Chi Chi Wu, staff attorney for the National Consumer Law Center, who added that the study provided further evidence that Congress should act on the Medical Debt Responsibility Act.

Cordray stopped short of advocating passage of the legislation, but he said something should be done.

"Given its enormity, given its influence over people's lives, and given its broad impact on our overall economy, there is undeniably much at stake in ensuing that credit reports and credit scores are working properly for both consumers and creditors," Cordray said in a statement. "Careful and accurate treatment of medical debt is deserving of greater attention."