The three credit agencies give a benefit to those with outstanding medical debt, and in the process show how much power they wield over us.
I’m on the Consumer Financial Protection Bureau (CFPB) mailing list, mainly so you don’t have to be.
I actually love it, as if there was ever an agency that you could say was the “good guys”, it’s the CFPB. They exist to protect consumer and enforce financial laws. They were formed in the wake of the financial crisis of 2008, spearheaded by none other than Elizabeth Warren, who is pretty much as badass as you can be.
Anyway, I got an update from the CFPB that might be relevant to some of you. And if nothing else, it’s a good reminder about the importance of looking after your credit history, as well as the unfortunate power that the credit agencies have over all of us.
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Credit report review
Everyone in the U.S. that has some kind of interaction with credit (basically every adult) has a credit history. This history is stored by three different agencies, TransUnion, Equifax, and Experian. Because these companies store information differently, sometimes your history may look different between them all.
For years now, you have had the ability to request, for free, a credit report from each of these agencies. This credit report is a listing of your credit involvement, including things like credit history, total debt, late payments, debts in collections, etc.
Here’s where you can order your free credit reports. If you haven’t done this recently, go do it, look it all over, and check for errors.
Your credit report does not contain your credit score, which is a separate metric devised by different company. (Fair Isaac Company, or FICO). So just be aware that you won’t get your credit score when you order your credit reports.
But that’s okay, because I’ve always said that in general, you should be worrying much less about your credit score, if at all.
Instead, what you should be doing is paying your bills on time, paying down your debt, and checking your credit report for errors (and fixing them).
Medical debt on your credit report
Medical debt is very common in the U.S., so much so that almost 20% of households have some form of overdue medical debt. Not just medical debt, overdue medical debt.
And that makes sense when you learn that medical debt is the leading cause of bankruptcy in the U.S., with 62% of bankruptcies being related to medical debt, according to one source.
Now, the reasons for this are varied, but we can round up the usual suspects of income inequality, the lack of socialized healthcare, poor regulations, and price opacity, leading many to get surprise bills that include hundreds of thousands of dollars in unexpected costs.
But this may be changing. The No Surprises Act is a new law designed to help protect Americans from certain unexpected medical bills. Among much else, it prohibits out-of-network healthcare providers from charging excessive fees, especially in emergency situations or when receiving non-elective treatments.
Related to this, in April, the three credit agencies made a change that will likely affect millions of adults, and—amazingly—for the better.
No more old or small medical debts on your credit report
The three credit agencies decided to do the following:
- They have removed from your credit reports all outstanding medical debts that are less than $500.
- They have removed from your credit reports all outstanding medical debts that are less than one year old.
I think we can confidently estimate that the vast majority of outstanding medical debt would be either less than one year old or less than $500, so this will mean that, for many, their credit reports will show fewer delinquencies.
And this estimate pans out, as the press release estimates that “nearly 70 percent of the total medical collection debt tradelines reported to the Nationwide Credit Reporting Agencies (NCRAs) are removed from consumer credit files.”
Why this matters
Those who review your credit report want to know that you will pay back the debts you incur. Delinquencies on your credit report is evidence that you might not pay back your debts, which could make lender less likely to lend, or to lend at a higher rate.
Also, this is one of those issues that lowers your credit score.
So for the almost 20% of households that have overdue medical debt, this will make those issues go away. Which will make your credit report look better, and your credit score higher.
Now granted, if you’re behind on lots of different payments, this isn’t going to fix all of your issues, but it can fix at least some of them.
Your next job, as it was before, was to make sure that you’re never behind on your payments. Getting caught up is more important, financially, than basically anything else. Stop putting money away. Use your emergency fund if you have it. And heaven forbid you’re working and get a 401(k) match at work: stop it right now. Pay what you owe.
Credit agencies have too much power
While it’s nice that the credit agencies did this, and that this will have tangible improvements for millions of people’s financial situations, I have to note that this shows just how much power that the credit agencies have.
And they could reverse this tomorrow if they wanted, or change any of their rules, as far as I can tell. We are, in many ways, at their mercy.
Which is why it’s so important to not interact with debt products unless absolutely necessary. The best place for your credit cards is in a locked drawer. The best way to not get into debt is to have a robust emergency fund and the proper insurance. This won’t avoid take away all risk, but it will surely help.
Also, let’s give a shout out to effective government oversight and regulations. Apparently, this move by the credit agencies was in part spurred by a damning report made a year prior by none other than the CFPB, which questioned the “outsized role” of medical debt on credit reports. This report made a difference.
So maybe we can say that the CFPB, like Elizabeth Warren, is kind of a badass in its own right.