Medical Debt and Credit Scores

Abstract

Information about unpaid medical bills is reported to the nationwide credit reporting agencies (NCRAs) from two sources. It can be reported directly by the medical service provider (e.g., a doctor) or by a third-party debt collection agency that has purchased the debt or been contracted to collect it. The vast majority of medical debt reported to the NCRAs – about 99.4 percent of accounts – is reported by collection agencies. We refer to the medical bills that collection agencies report as “medical collections.” Once reported, the information about these medical collections is reflected on the credit records that the NCRAs maintain. The information about these medical collections are then used by credit scoring models, such as the FICO and VantageScore models, to derive predictions about the creditworthiness of consumers. These predictions, called “credit scores,” can have a large effect on a consumer’s access to credit.

Credit scoring models generally do not differentiate between medical collections and the other debts that are reported by third-party collection agencies (“non-medical collections”), which include things like unpaid rent or cell phone bills. Traditionally, such models have also not differentiated between collections that have been fully repaid (“paid collections”) and those that remain unpaid (“unpaid collections”).

Bureau staff have constructed a data resource called the Consumer Credit Panel (CCP), which contains de-identified credit records for a representative sample of consumers. This resource is ideally suited to examine the role of medical collections in credit scoring models and to assess whether the identical treatment of medical and non-medical collections is justified by subsequent debt payment patterns.

First, we examine whether medical and non-medical collections are equally predictive about the subsequent respective credit performance of consumers with these different types of accounts. The answer appears to be “no.” Our results suggest that consumers with more medical than non-medical collections had observed delinquency rates that were comparable to those of consumers with credit scores about 10 points higher.

Second, we conduct a similar analysis that evaluates whether paid and unpaid medical collections are equally predictive of consumer delinquency rates. Again, the answer appears to be “no.” Consumers with more paid than unpaid medical collections had delinquency rates that were comparable to the rates of consumers whose credit scores were roughly 20 points higher. That is, consumers with paid medical collections were less likely to be delinquent than other consumers with the same credit score.

Note: This is another in an occasional series of publications from the Bureau of Consumer Financial Protection’s Office of Research. These publications are intended to further the Bureau’s objective of providing an evidence-based perspective on consumer financial markets, consumer behavior, and regulations to inform the public discourse.