A new rule finalized by the Biden administration on Tuesday is expected to ease a specific type of debt barrier for millions of Americans.
The rule will get rid of $49 billion in medical debt from the credit reports of 15 million Americans, as well as ban the inclusion of medical debt on credit reports altogether.
A study by the Consumer Financial Protection Bureau found that medical debt is a poor indicator of whether a person will pay back a loan, yet it's been a barrier for many Americans trying to get one.
Under the new rule, debt collectors will also no longer be able to use the credit reporting system to coerce people to pay bills they may not even owe in the first place, something that LendingTree’s chief credit analyst Matt Schulz told Scripps News is extremely common.
“People would be stunned at how often medical bills are inaccurate,” Schulz said. “80% of medical bills have errors on them. It’s a huge number.”
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CFPB estimates the rule will improve other parts of the economy as well. The rule is expected to result in an additional 22,000 mortgages every year and boost American’s credit scored by an average of 20 points.
“There’s very little in life that is more expensive than crummy credit,” Schulz said. “20 points absolutely can move you from good to very good, or fair to good, or whatever the next tier is that you’re going to. Moving from one tier to another in the credit scoring spectrum can save you real money. So, it’s a significant thing.”
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Americans can also expect more privacy.
Credit lenders will now be prohibited from using medical information when deciding whether to issue a loan, and medical devices such as wheelchairs and prosthetic limbs will no longer be allowed to be used as collateral if someone cannot repay a loan. Lenders will still be able to consider medical information however, when someone requests a loan for medical expenses or when someone delays paying a loan due to medical reasons.
If it is not rescinded by Congress, the rule will become effective 60 days after it is published in the Federal Register. But with the new administration coming in this month, Schulz warned the rule faces an uncertain future.
“There’s so many unknowns going into the next year with the new administration, that it’s hard to predict where things are,” said Schulz. “The CFPB in particular has always been very much a political football. So, any rules that it puts out are going to generate a lot of conversation and a lot of discussion on either side. So, it definitely bears watching going forward.”
