Bill seeks to erase medical debt from credit reports

August 1, 2011: 2:03 PM ET

NEW YORK (CNNMoney) -- Medical debts that you paid off long ago can drag down your credit score for years after you've settled them. But recently proposed legislation could mean old doctor bills will finally be erased from your credit report.

Rep. Heath Shuler (D-NC) proposed a bill that would require the three major credit bureaus to remove records of medical debt of up to $2,500 within 45 days of being paid off -- a move that could boost the credit scores of millions of Americans. Currently, any medical debt that gets sent to collections stays on your report for up to seven years -- even if you've paid it off or settled it.

The bipartisan Medical Debt Responsibility Act of 2011 was proposed earlier this summer and will be reviewed by the House Committee on Financial Services, which will decide whether to send it to the House or Senate for their approval (the date has yet to be set, but it could be voted on as early as the fall).

If the Act is approved, medical debts will no longer be factored into the calculation of a consumer's credit score -- making it easier for some people to qualify for or get better terms on credit cards, mortgages and other types of loans.

One medical debt can knock off about 50 points from an average credit score (though the impact varies depending on the information reported about the debt), said Howard Dvorkin, CPA and founder of Consolidated Credit Counseling. And of course, the more debts you have, the less the impact will be.

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"That medical bill [on your report] could be the difference between being credit-worthy and not credit-worthy," said Dvorkin.

The proposed measure could have widespread ramifications. In the last two years, 57% of the people who lost jobs that offered health insurance have become uninsured, according to a recent Commonwealth Fund study.

In 2010, 30 million adults were contacted by a collection agency for unpaid medical bills. Meanwhile, an estimated 44 million Americans said they were actively paying off medical debt in 2010, the study found.

"Medical debt is not a reliable indicator of credit risk, yet nearly a quarter of Americans have seen their credit scores plummet because of small, routine medical bills," said Rep. Nydia Velazquez (D-NY), a co-sponsor of the bill.

However, opponents of the bill -- including some lenders and credit reporting companies -- argue that removing medical debt from credit reports takes away an important factor in determining risk used in lending decisions.

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"The debt required to be removed from credit reports is not major medical debt, but still, there are exceptions that seem to undermine the purpose of credit reports even if well-intended," an American Bankers Association spokeswoman said.

About 35% of a consumer's FICO score is based on their payment history and whether they pay bills on time, and lenders say they have a right to know if a person was delinquent enough for any bills to be handed over to a collection agency.

Credit bureaus and lenders also argue that while erasing medical debts from credit reports will help those people who fell upon unfortunate circumstances, it will also aid those who were perfectly capable of paying their medical bills but chose not to -- a factor they use to determine a consumer's creditworthiness.

"Expunging predictive information is not in the best interest of consumers or credit granters -- both of which benefit when credit reports and scores are as accurate and predictive as possible," VantageScore, a credit-scoring company developed by Experian, TransUnion and Equifax, said on its website.

By deleting this information, the site said, the consumer may qualify for credit or other financial products that they aren't equipped to handle.

But, proponents, like Dvorkin, argue the bill will help far more people than it will hurt -- like the many people who have expensive medical conditions, unexpected health problems or who lack insurance after losing their job. It would also help the many Americans who end up in collection because of a billing mistake, or who get caught in the crosshairs of billing disputes between doctor's offices and insurance companies.

These disputes -- which typically occur over whether claims were properly submitted or whether they should be covered -- emerged as a growing issue among consumers last year, the Consumer Federation of America said in its annual list of top consumer complaints.

"The medical insurance world is crazy -- when you get a medical bill you're not sure if it's covered by insurance, if it's part of your deductible or if there's a co-pay involved," said Dvorkin. "Most people don't go out of the doctor's office with the intent not to pay the bill -- they just don't understand it."

Yet, Tom Quinn, a consumer credit specialist at and former vice president of scoring at FICO, said this bill doesn't solve the real issue.

Instead, he said, insurers and medical practitioners need to fix their billing practices and the way they communicate with patients about coverage to cause less confusion and reduce the number of mistakes that show up on credit reports in the first place.

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