Why medical debt shouldn’t affect credit scores

stethoscope and calculator on top of a medical bill
DNY59 via iStock | iStock.com

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Patrick Oh

Intern, CALPIRG

Imagine rushing to the emergency room for a life-saving procedure, only to find out months later when you are denied a job because the resulting medical debt has wrecked your credit score. This scenario is a harsh reality for too many Californians.

Medical debt on credit reports wreaks havoc on the financial lives of many people in our state. These blemishes, visible to employers, landlords, and creditors, lead to lower credit scores. This can compromise a family’s long-term financial stability by blocking access to mainstream credit, housing, and even some employment.

The fear of medical debt harming credit scores also creates a barrier to seeking necessary health care. People can end up skipping or postponing needed care, resulting in worse health outcomes.

Rising Health Care Costs

More than 1 in 5 Californians report having medical debt they are paying off to providers. Health care costs in California have been rising faster than the national average and inflation. This takes up an increasing portion of consumer income.

Why Medical Debt Should Not Be on Credit Reports

Unlike other types of debt, medical debt is typically unavoidable and a surprise. You can’t control coming down with a sickness or getting into a car accident. It also may be fraught with billing errors and disputes with insurers.

Inadequate Current Measures

The three major nationwide credit bureaus voluntarily stopped reporting unpaid medical debts under $500 in 2023. However, this measure is insufficient to protect Californians. Only 20% of Californians who have medical debts owe under $500, and one-third owe $2,500 or more.

The Consumer Financial Protection Bureau (CFPB) noted that “[f]ifty percent of those with medical collections on their credit report will continue to have medical collections on their credit report and so may experience limited benefits from the change.”

Additionally, so often Californians are not even made aware of existing medical debt until it is shown on their credit score or when they are unable to get a loan or house. A complaint submitted to the CFPB from a fellow Californian details this exact situation, “For the past 6 weeks or so, I’ve been applying to rental properties in preparation for my upcoming move. I have submitted applications to several properties recently and discovered that I have (4+) fraudulent, inaccurate, unverifiable, medical hard inquiry errors that I do not recognize.”

The CFPB’s research has found that medical debt does not predict a person’s creditworthiness. VantageScore’s decision, a type of credit score that lenders use to evaluate your creditworthiness, to exclude medical debts from its latest scoring models reinforces that these debts are unnecessary for predictive credit scoring. However, the most commonly used credit scoring model, FICO, still negatively treats unpaid medical debts.

Broader Implications of Medical Debt on Credit Reports

The impact of one’s low credit report can affect Californians in many ways. One Californian complaint to the CFPB quotes, “This(medical debt) is adversely affecting the interest rate on my student loans.” Another speaks to the struggles of getting a loan to support their business: “I am now trying to get a loan for my business, however I am having difficulties receiving an affordable rate.” 

Shelly Ehrke, a Californian, testified in support of SB 1061 in front of the California State Assembly Health committee, detailing the cascading ways in which medical debt has affected her.

Shelly Ehrke's story of how medical debt impacted her credit score

The Urgent Need for SB 1061

California can protect its consumers from the negative effects of medical debt by adopting Senate Bill 1061 by Senator Monique Limon. The CFPB has made clear that states have the authority to enact such consumer protections. While the Biden Administration and CFPB are working on related regulations, these are not yet finalized and could face legal challenges. 

Californians deserve a health care system that does not punish them for seeking care when needed. SB 1061 will increase access to credit and reduce barriers to necessary health care. By passing this bill, California will join Colorado and New York in banning the harmful practice of reporting medical debt on credit reports.

Help get this crucial legislation passed. Your support is needed urgently as this bill must be passed by August. Together, we can protect Californians from the detrimental effects of medical debt.

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Authors

Patrick Oh

Intern, CALPIRG

Patrick Oh is a senior at Pomona College studying Philosophy, Politics, and Economics and a summer intern with CALPIRG

Jenn Engstrom

State Director, CALPIRG

Jenn directs CALPIRG’s advocacy efforts, and is a leading voice in Sacramento and across the state on protecting public health, consumer protections and defending our democracy. Jenn has served on the CALPIRG board for the past two years before stepping into her current role. Most recently, as the deputy national director for the Student PIRGs, she helped run our national effort to mobilize hundreds of thousands of students to vote. She led CALPIRG’s organizing team for years and managed our citizen outreach offices across the state, running campaigns to ban single-use plastic bags, stop the overuse of antibiotics, and go 100% renewable energy. Jenn lives in Los Angeles, where she enjoys spending time at the beach and visiting the many amazing restaurants in her city.