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CFPB Study Finds Medical Debt Overly Penalizes Consumer Credit Scores

Study Finds Credit Scores Underestimate Creditworthiness for Consumers Who Owe and Repay Medical Debt

WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) released a research report that found consumers’ credit scores may be overly penalized for medical debt that goes into collections and shows up on their credit report. According to the study, credit scoring models may underestimate the creditworthiness of consumers who owe medical debt in collections. The scoring models also may not be crediting consumers who repay medical debt that has gone to collections.

“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer’s credit score,” said CFPB Director Richard Cordray. “Given the role that credit scores play in consumers’ lives, it’s important that they predict the creditworthiness of a consumer as precisely as possible.”

The study, “CFPB Data Point: Medical Debt and Credit Scores” can be found at:

Consumers’ three-digit credit scores are based on information in their credit reports, compiled by credit reporting agencies, also called credit bureaus. These scores play an increasingly important role in the lives of American consumers because most lenders decide to grant credit and set interest rates based on them. When overdue debt goes to collections and ends up on a consumer’s credit report, it decreases a consumer’s score. This means lenders are likely to take more caution when lending money because the consumer is perceived as less likely to pay it back on time.

According to a study by the Federal Reserve Board, over half of all collections on credit reports are associated with medical bills. The vast majority of medical debt reflected on credit records is reported by third-party collection agencies. In some instances, the consumer may not even be aware of a debt that has been sent to collections or that it is on their credit record. A collection account generally can stay on a report for up to seven years.

Many current credit scoring models do not differentiate between medical and non-medical debt in collections. This is true even though medical debt is different than other unpaid bills reported by collection agencies, such as unpaid phone or utility bills. Medical debt can result from an event that is unpredictable and costly. Sometimes the debt is caused by billing issues with medical providers or insurers. Complaints to the CFPB indicate that many consumers do not even know they have a medical debt in collections until they get a call from the collections agency or they discover the debt on their credit report.

Today’s study considered 5 million anonymized credit records from September 2011 to September 2013 to assess how well a common credit score predicted a consumer’s future likelihood of paying back debt. To do that, the study looked at the credit histories and scores of consumers in September 2011 and then examined their actual loan payment patterns over the next two years.

The study found that credit scoring models have not been considering medical debt as well as they could be. It found that if the credit scoring models accounted differently for medical debt in collection and medical debt that is repaid by the borrower, the models could be more precise. Specifically:

  • Credit scores may underestimate creditworthiness by ten points for consumers who owe medical debt: Treating medical and non-medical debt that goes to collections the same overly penalizes some consumers by giving them lower credit scores. Specifically, the study found that consumers with medical debt generally paid back their loans or bills on par with consumers with scores about ten points higher. Allowing for different treatment of medical and non-medical collections in credit scoring models may increase the scores of consumers with medical collections and improve credit scoring.
  • Credit scores may underestimate creditworthiness by up to 22 points after paying off medical debt: Traditionally, credit scoring models have not accounted for repayment of medical debts in collections. The study found that consumers who subsequently paid medical debt that had gone into collections were more likely to pay back their debts, on par with consumers with scores 16 to 22 points higher. Allowing for different treatment of paid and unpaid medical collections would likely result in increased scores for consumers who have paid their medical collections in full.

For consumers with lower credit scores, especially those on the brink of what is considered subprime, a ten- to 22-point difference can affect their interest rates and ability to borrow credit. Over time, the score difference could end up costing a consumer tens of thousands of dollars on large loans like home mortgages.

In 2012, the CFPB released a study examining credit scores that compared credit scores sold to creditors and those sold to consumers. Later that same year, the CFPB released a report on the consumer experience with the three largest nationwide credit reporting companies. The CFPB accepts consumer complaints about credit reporting.

The CFPB is the first federal government agency that supervises consumer reporting companies.

The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information, visit