Healthcare Costs and Households' Access to Credit

Abstract

Credit bureaus face significant friction in collecting consumer medical debt liabilities data. The incomplete and potentially erroneous medical liabilities data has spurred an intense policy debate about resulting consumer access to credit. This paper sheds light on this policy debate by examining whether healthcare costs—the core driver of often-unobserved consumer medical liabilities—affect the quality of the creditworthiness indicators used by lenders in credit decision. Leveraging a novel measure of healthcare costs based on Medicare spending, we document that local healthcare costs lead to upward (downward) bias in consumer credit scores (DTIs). Consumers in high-healthcare-cost CBSAs are 16.4% more likely to default than those in low-healthcare-cost CBSAs. These effects are particularly pronounced among consumers with low credit scores and high DTIs. Lenders are aware of these limitations and impose higher rejection rates on mortgage applicants in high-healthcare-cost CBSAs, more so for riskier borrowers. These effects are amplified after Q1 2022, when credit bureaus ceased factoring small medical debt collection accounts into credit scores and DTI calculations, confirming the role of the information collection frictions. Our findings suggest that restricting medical debt information flows biases credit scores (DTIs) estimates upwards (downwards), distorts the quality of the information provided by credit bureaus, and hinders efficient credit allocation.

JEL Classification: G51, J21, J24