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Medical debt is no joke. Not only does the U.S. have the most expensive healthcare of any country, but medical debt is the No. 1 reason Americans file for bankruptcy, according to the American Medical Association (AMA).
Medical debt can also play havoc on a person's budget and personal finances, causing their credit score to plummet and making it harder for them to get credit when it's needed.
With those issues in mind, the Biden administration is pushing to have medical debt removed from credit reports and to prevent lenders from making decisions based on medical debt.
A step in the right direction
Two years ago, Experian, Equifax, and TransUnion -- the big three national credit reporting agencies -- announced that they were removing medical debts under $500 from credit reports. Removing relatively small medical debts certainly represented a step in the right direction for many U.S. consumers. Still, 15 million Americans were left with $49 billion worth of medical bills on their credit reports.
The Biden administration plan would force credit reporting agencies to go much further.
What this could mean for you
What matters is how erasing medical debt from credit reports will impact the everyday American. If your credit report currently lists medical expenses among your unpaid debts, here's how this change may benefit you.
Your credit score will get a boost
The Consumer Financial Protection Bureau (CFPB) estimates that Americans with medical debt on their credit reports will see their credit scores rise by an average of 20 points once medical debt is removed. A sudden 20-point boost may be just what some households need to qualify for a loan or open a credit card.
Your medical issues won't be public knowledge
While credit reports only show that you have outstanding medical debt and don't spell out the specifics, anyone who sees a copy of your report can tell that you (or someone in your household) have been ill.
That may not matter if you're applying for a car loan, but it could impact whether a potential employer checking your credit report decides to take a chance on you or a landlord believes you can pay your rent every month. In other words, it raises questions that should never be raised.
Your medical equipment cannot be repossessed
The proposed rule would prevent lenders from repossessing medical equipment like wheelchairs if you can't repay a loan.
Bill collectors can no longer use medical debt as a weapon
According to the CFPB, under the current system, medical debt collectors use the credit reporting system to force people to pay debts -- some of which they may not owe. CFPB reports that many debt collectors use a practice known as "debt parking."
Here's how it works: Debt collectors purchase medical debt at a discount. They then place the debt on your credit report, typically without your knowledge. It's only when you apply for credit that you discover that medical debt is holding you back from loan approval.
If you really need that loan, you may feel forced to pay the medical bill just to get it off your credit report and improve your credit score. Once medical debt no longer shows up on credit reports, bill collectors can no longer use this manipulative tactic.
This doesn't mean debt will be erased
There are undoubtedly benefits associated with having medical debts removed from your credit report, but you will still be responsible for repaying the debt. The point of removing the debt from your report is to make it easier for you to carry on with your financial responsibilities and get back on your financial feet.
The CFPB will continue to accept comments and feedback on the Biden administration proposal through Aug. 12, 2024. If all goes well, the rule will be finalized early next year.
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