U.S. consumer watchdog says credit scores too harsh on medical debt

WASHINGTON Tue May 20, 2014 3:25pm EDT

WASHINGTON May 20 (Reuters) - Credit scores used to determine whether borrowers can take out loans may overly penalize people with medical debt, the U.S. government's consumer watchdog agency said on Tuesday.

Credit reporting agencies calculate consumers' credit scores in an effort to predict whether they are likely to pay back loans. Businesses use the scores to decide whether to extend loans and how much to charge borrowers for them.

The U.S. Consumer Financial Protection Bureau said models for calculating the scores appear to underestimate the creditworthiness of consumers who have medical debt outstanding, and even those who have paid off such debt.

That is because consumers wind up with medical debt in different ways than they incur other types of debt, such as home loans, for which borrowers typically know the costs involved, the consumer bureau's director, Richard Cordray, said.

For instance, sometimes insurance companies do not cover the entire cost of medical procedures, but consumers may not realize they owe money until they are contacted by a debt collector. Even if they pay it off, their credit scores could take a hit.

"Having a medical debt in collections is less relevant to a consumer's creditworthiness than having an unpaid cell phone bill or overdue rent," Cordray said. "Scores could be more predictive if they treat medical debt and non-medical debt differently."

The consumer bureau, which was created by the 2010 Dodd-Frank law, oversees large credit reporting agencies. Bureau officials said they do not plan rules on the subject but that firms could adjust their models to treat medical debt differently from other debt. (Reporting by Emily Stephenson; Editing by Tom Brown)

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