The provider will no longer include medical debt in its credit scoring model beginning in mid-October. ACA International is reviewing the change for members and offers initial insights here.
08/11/2022 2:00 P.M.
4 minute read
VantageScore announced this week that neither of its most recently introduced scoring models (VantageScore 3.0 and 4.0) will continue to use medical debt collection data in the calculation of consumers’ credit scores, regardless of the amount owed or the age of the collection.
VantageScore said in a news release that the decision arises from recognizing that “medical debts and collections that have been paid off are not predictive of a consumers’ creditworthiness.”
ACA International CEO Scott Purcell said that ACA can appreciate the work done by VantageScore concluding that medical debt, unpaid or paid, may not be as a strongly correlated predictor of debt repayment for consumers as other indicators.
“However, we believe medical debt in collections should very much still show as tradelines on a credit report so that future credit grantors truly know the overall financial picture of that borrower in terms of repayment ability, and so the consumer knows about the debt,” Purcell said.
After the announcement that the three national credit reporting agencies (CRAs) are no longer reporting paid medical debt collection accounts and medical debt collection accounts less than a year old, ACA has growing concerns that these overall changes to the medical debt credit reporting system from CRAs and Vantage, perhaps prompted by the Consumer Financial Protection Bureau, are eliminating a beneficial communication channel for consumers about their finances.
Leah Dempsey, ACA’s lead lobbyist and partner at Brownstein, Hyatt, Farber, Schreck, reflected on how the issue of credit reporting is a focus of many federal agencies, including the Federal Housing Finance Agency, as reported here.
“We think setting an arbitrary threshold, and removing a vital communication tool, to not include any type of debt in a consumer credit portfolio is a slippery slope to risky lending for creditors and could ultimately harm consumers by reducing access to credit or medical services and increasing costs,” Purcell said in a letter to the CRAs this spring.
VantageScore estimates that consumers with this type of information in their credit files will likely see scores increase by as much as 20 points when either the VantageScore 3.0 or 4.0 models are used, according to their release.
Impact to the VantageScore models’ predictive performance is expected to be minimal for a large segment of the population, and both VantageScore 3.0 and 4.0 will continue to rank order effectively, it reports.
While this algorithm change is outside of the medical debt credit reporting changes from the CRAs, it is another possible change that could prevent future creditors from knowing consumers have or have had medical debt in collections, Purcell said.
“Health care providers’ receivables offices typically don’t report medical debts, so having it come from debt collectors is an important way to make sure America’s credit ecosystem remains sound,” he said.
For example, if a consumer had four different medical bills of $500, a potential credit grantor who knows that can take it into account in ensuring the consumer isn’t offered new credit in an amount that wouldn’t overwhelm their budget, especially compared to a person who had one medical bill for $175.
Likewise, if someone owed a $6,500 medical bill and was in collections, a potential credit grantor should know that information as there’s a reasonable chance that bill could end up as a judgment and a garnishment, and not knowing this could very well allow for a bad credit decision to be made, which would be more ruinous to a consumer (leading to potential bankruptcy, the stress of being behind on the new credit facility, etc.).
“ACA feels that adjusting the credit score based on a credit grantor’s needs, but still reporting medical debt that is in collections, is a much better way to address all of the needs in the market,” Purcell said. “We have partnered with various association members whose data demonstrates the economic value of credit reporting, as well as the consumer benefit of increased discussions and even increased disputes, which typically lead to insurers paying the obligation.”
Lastly, as previously reported, the emergence of comprehensive credit reporting not only democratized access to credit, but has been transformative for lower-income Americans to grow in their access to financial services and credit. To chip away at the comprehensive nature of our credit reporting will only cause credit grantors to exclude more people by raising minimum scores, or charge more for riskier borrowers, or both.
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