The three main credit bureaus are taking a big consumer-focused step: as of July 1, medical debt will be wiped from most U.S. credit reports. What does this mean for consumers as one in ten Americans has medical debt to pay back? Ted Rossman, Bankrate.com senior industry analyst, joins Closing Bell to discuss the impact this will have on credit scores and wallets, and more. 

Closing Bell

As Medical Debt Is Cleared From Credit Reports, What Does it Mean for Consumers?

Alright switching gears now, data shows that one in 10 American adults. Oh at least $250 in medical debt. And now they could be getting some relief as of July one. The three major credit bureaus have removed medical debt from consumers. Credit reports which eliminates long term financial consequences even if people paid their bills. So what does this change mean for credit scores and wallets joining us now is Ted Rossman, senior industry analyst at Bankrate dot com and ted how big of a deal is medical debt being cleared from credit reports? It's potentially huge. 43 million americans have $88 billion worth of medical debt on their credit reports according to the C. F. P. B. And about 70% of that is going to be coming off with these upcoming changes. So the two that just took effect paid medical collections are removed and unpaid medical collections that are less than a year old. So those should have already come off As of July one and then early next year these unpaid medical collections under $500 are going to be coming off if you have otherwise strong credit and one of these medical collections is dragging you down that could be costing you 100 points or more. So that's where this removal can really help some people now who is likely to see the impact of this and how soon it should be immediate for those first two, the paid medical collections and the unpaid under a year. The biggest benefits are going to go to people where these are their only blemishes. Now. If you also have late payments and a lot of debt, well then it's not going to help you as much. But for instance, I heard from a consumer recently who dropped from about 8 10 to about 6 90 on the Fico scale just because of this one medical bill in collections and in her case it's relatively recent and it's a relatively small amount. So that's going to come off, should have already come off That could instantly give her 120 points back on her score. So that's huge in terms of being able to qualify for loans and lines of credit, getting better interest rates. It's really a massive jump. So unpaid medical collections won't be reported for a year. What do people need to know about this if they have bills to pay? There are a few important clarifications here. One is that medical debt doesn't usually appear on credit reports unless it goes to collections. So try to head it off before that negotiate with the doctor or hospital, could they give you a payment plan? Often they're willing to work with you. Is it even your responsibility? This might be something that insurance is supposed to pay and that's actually part of why the credit bureaus are making this change. Is that is really not apples to apples with other debts. Your credit score is supposed to assess your credit risk medical debt may be a one off life or death thing. Maybe insurance was supposed to pay it pretty different from paying your monthly car loan or credit card or mortgage or something like that. So why is this just now happening? Why has medical debt never been cleared from reports until now? Yeah, it's a good question. The C. F. P. B. Has been poking around this issue. So I think they had a lot to do with it. It reminds me of how a few years ago public records came off credit reports for much the same reason. Things like traffic tickets and library fines. If those had gone to collections, those used to hurt people's credit. Not anymore. Same thing with tax leans the feeling is that these are not really as representative. They have not proven to be as predictive of future risk. Now on the other side, some things that didn't used to count now do like certain options such as experience boost where you can opt in and get your cellphone plans, your utilities, your streaming services reported to the credit bureaus. I think a lot of this is this whole risk assessment of what represents sort of a good credit risk and what is really not as predictive. So I mean is it because like medical debt is usually like a one time thing where when it comes to car payments or your cellphone is reoccurring month every month. It's testing you why is health debt just like not that big of a deal. I think that has a lot to do with it. And to clarify also this doesn't absolve you of the debt. You still owe this money. You could still potentially be sued. You're still supposed to pay it back even if it's not appearing on the credit report for the aforementioned reasons. But yeah, I think the changes track back to its not as representative of credit risk. This may be an isolated event to life or death kind of thing. Maybe it was insurances, responsibility not yours. That's where the credit bureaus I think are leaning more into things that operate like a monthly car loan payment or mortgage or credit card buy now pay later is another one that's starting to come on to credit reports. The feeling is that those kind of plans from affirm and afterpay in the lake is more apples to apples. Whereas medical debt that's kind of a different situation. So what actionable steps can our viewers take to see if their medical debt has been cleared from the reports? Go to a site like annual credit report dot com which is a free resource mandated by the government check to see if there is anything on there that shouldn't be on there. So at that point This includes paid medical collections and unpaid collections that are less than a year old. You shouldn't be seeing those anymore early next year. These amounts under $500 should come off. So if anything looks amiss, dispute it with the credit bureaus. That's actually a good practice just in general. Maybe it's a tip off for identity theft, maybe it's an honest mistake. So pull those credit reports. You can do it for free weekly at annual credit report dot com if you choose. And then also, you know, just be mindful of the fact that you can negotiate with doctors and hospitals. It doesn't hurt to ask a last resort would be to put this on a credit card because then it's credit card much higher interest rate viewed less favorably by the credit bureaus. Try to work it out with the doctor or hospital first. Maybe a personal loan or nonprofit credit counseling could be a Plan B. But start by asking that doctor for a break. All right. Ted Rossman, senior industry analyst at Bankrate dot com. Ted thank you as always.