Mar 7, 2023

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Part 2: What is Credit Reporting, and How Does It Harm People with Medical Debt?

by | Mar 7, 2023

Accessing and maintaining good credit is essential to achieving economic mobility. However, a derogatory mark on a credit report can likewise significantly harm one’s life. When an individual struggles to pay off medical debt, the resultant poor credit report can wreak havoc on finances. But to understand the risk to consumers, we must first understand: what are credit reports, and how do they work?  

A credit report is a record of a consumer’s credit history and current status of debts. It is designed to signify the consumer’s creditworthiness to potential lenders and summarizes elements of “credit history,” which can include such items as credit card activity, loans, bankruptcy, and outstanding debt, including any medical debt, legal liabilities (if the individual has been sued), and more. A credit report is compiled by a credit reporting agency (CRA), also known as a credit bureau. Banks, lenders, and collection agencies send information about a person’s debt to a CRA. There are three primary CRAs: Experian, Transunion, and Equifax (also called the “big 3.”) Each of these companies take all of one’s credit history and compile it into a credit report. 

A credit score, in contrast, is a three-digit number that is used to approximate credit risk, i.e., the likelihood a consumer will make future payments on time, for lenders. Credit scores are created by credit score providers, like FICO and VantageScore, which take the information included on a credit report and generate scores based on proprietary algorithms.  

When a CRA is alerted to a new consumer debt, that information goes onto the person’s credit report. In turn, the CRA sends that information to a credit scoring provider. When someone like a lender or landlord checks a person’s credit score, they request it from a credit scoring provider.  

When debts go unpaid, they are passed off to a debt collector, a process often referred to as “going to collections.” Once a debt is reported as “in collections,” the CRAs then send that information to credit score modeling companies, which can have devastating impacts on a credit score. Notably, creditors, lenders, and collections agencies aren’t obligated to report debts to all three CRAs. One person’s credit report may look different depending on which CRA generated the report.  

Credit reports may be accessed by a variety of entities from banks and lenders to landlords and utility companies. Even some employers use credit reports in hiring decisions, ostensibly to look for risk of theft and irresponsibility. As a result, bad credit can bar one from landing a job, buying or renting a home, being offered affordable rates on car loans and insurance premiums, and even accessing essential utilities. 

 

Medical Debt and Reports 

Medical debt should not be included on credit reports for myriad reasons. A Consumer Finance Protection Bureau (CFPB) study found that when credit reports include medical debt, credit scores significantly underestimate consumers’ creditworthiness. Furthermore, CRAs estimate that only 0.07% of medical debt reported to them comes from medical providers, while the rest are from collection agencies. No other industry operates such that only negative information is reported to CRAs. So, if a person is making payments to their medical provider, there is a slim chance that person would see positive impacts on their credit report from on-time payments the way other debt payments would. In all but rare instances, medical debt negatively impacts a person’s credit report.  

The scale of the problem is exacerbated by a system which is highly prone to errors and false claims of debt. The Consumer Reports study “A Broken System: How the Credit Reporting System Fails Consumers and What to Do About It” found that 34% of study participants found at least one error on their credit reports. Not only does medical debt negatively skew credit reports, but these harms are often based on wrong information.  

There are two main credit score algorithms that are generally used by lenders and creditors: FICO and VantageScore. Recently, VantageScore made the determination that their newest credit scoring models would no longer consider medical debt in their algorithm. In making this voluntary change, VantageScore cited the low predictive value of medical debts in collections in creditworthiness, and anticipated that millions of consumers would see an increase to their credit score under the new model. While this is a great step for consumers, the vast majority of lenders continue to use FICO scores, older scoring models from VantageScore, or credit scores from other providers.  

Starting July 1, 2023, the big 3 CRAs will voluntarily remove medical debt of less than $500 from credit reports. They will also wait 12 months before reporting other medical debt on credit reports. Though these appear to be laudable changes, some consumers will still be left behind. According to an analysis by the CFPB, people who are low-income, BIPOC individuals, and people with disabilities or chronic illnesses will receive less relief. People of color are less likely to have medical debt under $500 and will be less impacted by the industry changes.  

Ultimately, while this policy seems like a positive step, it actually just perpetuates inequities on who is impacted by medical debt and leaves millions of vulnerable Americans behind. These voluntary changes don’t apply to other credit reporting and credit scoring agencies, and there are no guarantees that these changes will be permanent. A CCLP-led bill, House Bill 23-1126, would remove all medical debt from credit reports improving access to housing, employment, credit, and more for over 700,000 Coloradans. These protections would make the changes industry-wide in Colorado and would be a long-lasting solution. HB23-1126 is crucial to fill in the gaps of the voluntary changes made by the credit reporting industry so that no Coloradan is left behind.  

 

Stay tuned for the next post in the medical debt series which will cover the impacts medical debt has on people. 

For more information on HB23-1126 click here. 

Click here to read Part 1: Medical Debt and Credit Reporting: A CCLP Deep-Dive. 

Recent articles

HEALTH:
HEALTH FIRST COLORADO (MEDICAID)

To maintain health and well-being, people of all ages need access to quality health care that improves outcomes and reduces costs for the community. Health First Colorado, the state's Medicaid program, is public health insurance for low-income Coloradans who qualify. The program is funded jointly by a federal-state partnership and is administered by the Colorado Department of Health Care Policy & Financing.

Benefits of the program include behavioral health, dental services, emergency care, family planning services, hospitalization, laboratory services, maternity care, newborn care, outpatient care, prescription drugs, preventive and wellness services, primary care and rehabilitative services.

In tandem with the Affordable Care Act, Colorado expanded Medicaid eligibility in 2013 - providing hundreds of thousands of adults with incomes less than 133% FPL with health insurance for the first time increasing the health and economic well-being of these Coloradans. Most of the money for newly eligible Medicaid clients has been covered by the federal government, which will gradually decrease its contribution to 90% by 2020.

Other populations eligible for Medicaid include children, who qualify with income up to 142% FPL, pregnant women with household income under 195% FPL, and adults with dependent children with household income under 68% FPL.

Some analyses indicate that Colorado's investment in Medicaid will pay off in the long run by reducing spending on programs for the uninsured.

FOOD SECURITY:
SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM (SNAP)

Hunger, though often invisible, affects everyone. It impacts people's physical, mental and emotional health and can be a culprit of obesity, depression, acute and chronic illnesses and other preventable medical conditions. Hunger also hinders education and productivity, not only stunting a child's overall well-being and academic achievement, but consuming an adult's ability to be a focused, industrious member of society. Even those who have never worried about having enough food experience the ripple effects of hunger, which seeps into our communities and erodes our state's economy.

Community resources like the Supplemental Nutrition Assistance Program (SNAP), formerly known as Food Stamps, exist to ensure that families and individuals can purchase groceries, with the average benefit being about $1.40 per meal, per person.

Funding for SNAP comes from the USDA, but the administrative costs are split between local, state, and federal governments. Yet, the lack of investment in a strong, effective SNAP program impedes Colorado's progress in becoming the healthiest state in the nation and providing a better, brighter future for all. Indeed, Colorado ranks 44th in the nation for access to SNAP and lost out on more than $261 million in grocery sales due to a large access gap in SNAP enrollment.

See the Food Assistance (SNAP) Benefit Calculator to get an estimate of your eligibility for food benefits.

FOOD SECURITY:
SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS AND CHILDREN (WIC)

Every child deserves the nutritional resources needed to get a healthy start on life both inside and outside the mother's womb. In particular, good nutrition and health care is critical for establishing a strong foundation that could affect a child's future physical and mental health, academic achievement and economic productivity. Likewise, the inability to access good nutrition and health care endangers the very integrity of that foundation.

The Special Supplemental Nutrition Program for Women, Infants and Children (WIC) provides federal grants to states for supplemental foods, health care referrals, and nutrition information for low-income pregnant, breastfeeding and non-breastfeeding postpartum women and to infants and children up to age five who are found to be at nutritional risk.

Research has shown that WIC has played an important role in improving birth outcomes and containing health care costs, resulting in longer pregnancies, fewer infant deaths, a greater likelihood of receiving prenatal care, improved infant-feeding practices, and immunization rates

Financial Security:
Colorado Works

In building a foundation for self-sufficiency, some Colorado families need some extra tools to ensure they can weather challenging financial circumstances and obtain basic resources to help them and their communities reach their potential.

Colorado Works is Colorado's Temporary Assistance for Needy Families (TANF) program and provides public assistance to families in need. The Colorado Works program is designed to assist participants in becoming self-sufficient by strengthening the economic and social stability of families. The program provides monthly cash assistance and support services to eligible Colorado families.

The program is primarily funded by a federal block grant to the state. Counties also contribute about 20% of the cost.

EARLY LEARNING:
COLORADO CHILD CARE ASSISTANCE PROGRAM (CCCAP)

Child care is a must for working families. Along with ensuring that parents can work or obtain job skills training to improve their families' economic security, studies show that quality child care improves children's academic performance, career development and health outcomes.

Yet despite these proven benefits, low-income families often struggle with the cost of child care. Colorado ranks among the top 10 most expensive states in the country for center-based child care. For families with an infant, full-time enrollment at a child care center cost an average of $15,140 a year-or about three-quarters of the total income of a family of three living at the Federal Poverty Level (FPL).

The Colorado Child Care Assistance Program (CCCAP) provides child care assistance to parents who are working, searching for employment or participating in training, and parents who are enrolled in the Colorado Works Program and need child care services to support their efforts toward self-sufficiency. Most of the money for CCCAP comes from the federal Child Care and Development Fund. Each county can set their own income eligibility limit as long as it is at or above 165% of the federal poverty level and does not exceed 85% of area median income.

Unfortunately, while the need is growing, only an estimated one-quarter of all eligible children in the state are served by CCCAP. Low reimbursement rates have also resulted in fewer providers willing to accept CCCAP subsidies.