CFPB Reports: The Credit Report Game Is Rigged -- and Not in Your Favor

Banks are minting millions, charging too-high interest rates based on credit reports that have been damaged by overdue medical bills. Is this fair? And what can you do about it?

May 26, 2014 at 10:37PM

If there's one thing that Americans might possibly fear more than getting sick, it's the cost of getting sick.

We've all heard (or lived) the stories about how the rising cost of medical care is draining consumers' wallets, and pushing more and more families to the financial precipice. Earlier this year, the personal finance experts at NerdWallet Health tried to quantify the danger for us. In a report released in March, NerdWallet estimated that:

  • 56 million Americans under age 65 had trouble paying medical bills in 2013
  • Over 16 million children live in households having this trouble
  • Over 15 million American adults (ages 19-64) used up all their savings paying medical bills
  • And about 1.7 million Americans live in households that had to declare bankruptcy because of these bills. 

In fact, NerdWallet reports that "medical bills are the leading cause of personal bankruptcy, a last resort after millions of families have drained their savings, maxed their credit cards and even refinanced their homes." But even before reaching such straits, over 35 million American adults faced phone calls from collections agencies seeking payment on overdue medical bills. Nearly half of these consumers, unable to pay on time, had their credit ratings dinged.

Is this fair? Are these Americans, unable to pay their medical bills dodging bills they agreed to pay? Or is there something else going on that explains the rising tide of health care-inspired financial distress?

The Consumer Financial Protection Bureau thinks it's the latter.

Hands up! Hand over your money, or your credit score!
Backing up NerdWallet's findings this week is a new report by the Consumer Financial Protection Bureau (CFPB). Over the course of study from September 2011 to September 2013, CFPB examined 5 million anonymous credit records to try to understand the connection between medical billing and consumer credit scores. And as CFPB Director Richard Cordray explained, "[C]onsumers' credit scores may be overly penalized for medical debt that goes into collections and shows up on their credit report."

According to CFPB, over half of all bill collections reported on credit reports today derive from unpaid bills for hospital, doctors office, lab testing, and other medical services. And because these reports hurt a person's credit score -- which banks check before approving a loan -- consumers end up paying higher interest rates on credit cards, car loans, and mortgages -- or lose access to such loans entirely.

Before you jump to the conclusion that this is fair and just, take a moment to consider how these medical bills came to be created in the first place.

Most health care these days gets funneled through health insurance companies. And according to analysts at BGR, consumers currently give these companies "customer satisfaction" marks nearly as bad as what cable company Comcast gets. Among publicly traded insurers, a recent ranking of customer satisfaction gives top marks to Humana and UnitedHealth Group. But even with these, you don't have to surf the Web very long to find a litany of complaints about the service.

At the root of the problem, as CFPB explains: "[I]n many ways, medical bills are unusual. When you take out a loan, typically you know how much you will owe and the interest rate you will be charged up front. But with medical costs, you have less visibility. Costs are often unknown until after treatment. Choice is a grey area for consumers when they get sick or need a medical procedure quickly."

And that's not even the worst part. As anyone who's visited a doctor's office in recent years can attest, the billing process is a huge mess. You start out with an office visit, not knowing what services you might need, or what the doctor might charge for them. Your health insurance contract -- long as the U.S. Tax Code, but not half as interesting -- may or may not tell you what costs it covers and in what situations. Heaven help you if you have to decipher it yourself.

What's up, Doc?
And then the bills start coming. Bills from your doctor. Bills from the hospital she's "affiliated" with. Bills from the x-ray company down the hall from the doctor. (Wait! That's a separate company)? Bills from the lab that analyzed the results of your blood test. And all of these came from a single office visit? What's up (with that), Doc?

Citing a litany of complaints CFPB has received regarding this process, Director Cordray notes that very often "consumers do not even know they have a medical debt in collections until they get a call from a debt collector." At which point the damage has already been done.

No good deed goes unpunished
Adding insult to credit report injury, CFPB noticed another trend. Once notified of an overdue medical bill, most Americans do the right thing, and try to pay the bill. But oftentimes, this doesn't get reflected on the credit report.

The reason: "[M]any credit scoring models do not change a consumer's credit score when a medical collection is paid."

And the effect: "[C]redit scores may underestimate ... [the creditworthiness of consumers who repaid their overdue medical bills] by a median of 16 to 22 points."

What you can do about it
How can you protect your credit rating, or minimize the harm from a credit report already damaged by overdue medical bills? Well, you can't start to fix the problem until you know there is a problem. So, first and foremost, CFPB advises to check your credit report! Consumers have the legal right to review their credit report at each of the major credit reporting agencies, free of charge, once per year. (Get started here.)

Once you've found a collections action on your report (or learned of it from a collections call), the next step is to pay that bill. Remember, too, that collections agencies are all about getting the bill paid. They have no vested interest in trying to hurt your credit score, so enlist their help in getting your credit report cleaned up. Ask them to remove the collections notice -- and you may be surprised to find how happy they will be to assist, in exchange for getting the bill paid.

The best way to fix a problem, of course, is to prevent it arising in the first place. Upon receiving a medical bill in the mail, the best policy is to pay first, ask questions later. Duplicative billing -- multiple bills from multiple providers for one and the same office visit -- is now the rule rather than the exception in health care. If you've paid for a service once, then get another bill from another source, apparently for the same service, it's actually probably legit. Pay it.

(But do make sure to pay with a credit card. That way, if it ultimately turns out that the bill actually was a mistake, you can dispute it through your card company later.)

Corporate America's little $20.8 trillion secret
Between government handouts after the Financial Crisis, and their ability to raise interest rates on loans at whim, based on flimsy credit reports, America's too-big-to-fail banks have had a good run. But all "good" things must come to an end. There's a brand-new company that's revolutionizing banking -- and it's poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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