Removing medical collections from credit data should raise scores

A change by credit-reporting agencies on how medical-collection data are handled will likely benefit consumers seeking a mortgage, but to what extent remains uncertain.

But higher credit scores alone should allow more consumers to qualify for a loan, if not a better interest rate.

The move to leave medical collections off credit reports beginning this summer, jointly announced by Equifax, Experian and TransUnion, provides "welcome relief" to consumers, especially those that had unforeseen medical bills because of the pandemic or other reasons, said Shelley Leonard, the president of Xactus, the largest provider of the trimerge credit reports used to underwrite mortgages.

So while it will have a positive effect on the credit scores derived from the information those repositories maintain, it is hard to define how much improvement there could be because every consumer is unique, Leonard continued.

"However, it is helpful to understand that industry-standard mortgage scores treat an unpaid medical collection as seriously derogatory information," Leonard said. "The existence of a single collection can keep a consumer from achieving the top category of creditworthiness."

Credit-analytics firm FICO created the algorithm used for the vast majority of originated mortgages, including all conforming and government-insured loans. Back in 2014, the company released FICO 9, an update which differentiated medical bills from other debt sent to collections. However, Fannie Mae and Freddie Mac continue to use an older version of the algorithm.

The company is working with the credit bureaus to quantify the impact of this change, Ethan Dornhelm, vice president, FICO Scores and predictive analytics, said.

"We anticipate that the aggregate impact of this change on [a] FICO score will be modest, given our early estimates that just one in 10 FICO-scorable consumers have medical collection information that would be impacted by this new policy," Dornhelm pointed out.

VantageScore, FICO's competitor that is jointly owned by the credit-reporting agencies, noted that back in 2013, it made the decision to completely eliminate medical-collection accounts that had been paid off from customer files. Since then, it has taken additional steps to reduce the impact medical debt has on a person's credit score, according to a company statement applauding the change.

"Medical accounts are different from other consumer debt because they often arise from unforeseen circumstances and complicated, opaque insurance and health-care provider billing practices," said Silvio Tavares, president and CEO of VantageScore. "Based on empirical research, these types of debts and collections that have been paid off are often not as predictive of a consumer's creditworthiness."

The repositories will initiate the change effective July 1. Starting that day, paid medical-collection debt will no longer be included on consumer credit reports. In addition, the time period before unpaid medical-collection debt would first appear on a consumer's report will be increased to one year from six months. The goal is to give consumers more time to work with their insurer and/or health-care provider to address debt before it is reported on a credit file.

Then, in the first half of 2023, Equifax, Experian and TransUnion will no longer include medical collection debt of $500 or less on credit reports.