70% of medical collection debt will soon be removed from credit reports—and it could boost your credit score

The three major credit reporting agencies will remove 70% of medical debt information from consumers' credit reports.

If the debt has already been paid, the medical collection debt will no longer appear on the credit reports. The agencies are increasing how long it takes for that debt to appear on a consumer report from six months to one year. If the debt is less than $500, they will remove it from reports.

The Consumer Financial Protection Bureau was considering banning medical debt before the changes were announced.

In the second quarter of the year, 42% of bills that were in collections and on people's credit records were medical bills, according to a recently published report. The report found that medical debt collections were less likely to predict future payment problems than other debt collections.

A recent National Consumer Law Center report found that people of color are disproportionately affected by medical collection debt.

Medical debt is not included in your credit report if it stays with your original service provider, but once it goes to collections it can affect your credit score. The new rule will remove these debts from your credit report if they are paid off. If you have collection debt on your credit report, it can decrease your credit score by as much as 120 points. Your credit score is used to determine if you will be able to get a loan, as well as the interest rate.

Ted Rossman, a senior industry analyst at Bankrate, said in a statement that some of the newer FICO and VantageScore algorithms disregard paid medical collections and place a lower emphasis on unpaid medical debt compared to other types of debt.

The credit bureaus have been encouraged to remove paid medical collections from their reports by the CFPB.

The removal of medical collection debt will increase credit scores for people who have had debt in the past.

Rossman said that there seems to be an acknowledgment that medical care is essential and should not be punished by the credit bureaus.

Over half of Americans have medical debt, even those with health insurance.

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