Credit scoring models may over-estimate the impact of consumers’ medical debt, according to a study from the Consumer Financial Protection Bureau.
Delinquency rates may be lower for certain consumers with medical debt referred for collection both before and after it is paid, the bureau said. Its May 20 study was aimed at assessing the ability of credit scores to predict a consumer’s future likelihood of paying back debt.
Study results suggested that consumers with more medical than non-medical debt in collection had observed delinquency rates comparable to those of consumers with credit scores about 10 points higher.
Similarly, consumers who paid off the majority of their medical debt in collection had delinquency rates comparable to the rates of consumers whose credit scores were roughly 20 points higher, the bureau said.
More than half of all collections on credit reports are associated with medical bills, according to Federal Reserve figures cited by the CFPB.
The study comprised 5 million anonymized credit records analyzed over a two-year period. Credit histories and scores were examined in September 2011 and were then compared with actual loan payment patterns over the next two years.
Credit scoring models could be more precise if they differentiated between medical and non-medical debt in collections, said CFPB Director Richard Cordray in a press call. “Treating medical and non-medical debt identically lowers some consumers’ scores by more than is warranted given their observed likelihood of repaying loans,” he said.
Cordray stressed the possibility of such undifferentiated models negatively impacting those consumers who already have low credit scores.
The CFPB also would like more credit card companies to provide credit scores and educational information to customers on a monthly basis, he said.
“Given its enormity, given its influence over people’s lives and given its broad impact on our overall economy, there is undeniably much at stake in ensuring that credit reports and credit scores are working properly for both consumers and creditors,” Cordray said. “Careful and accurate treatment of medical debt is deserving of greater attention.”