What Does Bad Credit Really Reveal? Reporting Errors and Medical Debt

The credit reporting industry likes to argue that credit checks reveal something about an individual’s character or ability to act responsibly. But two recent newspaper reports underscore just how dubious a proposition this is: this weekend, the New York Times scrutinized the destructive toll out-of-control medical bills can take on credit, while the Columbus Dispatch trained its sights on the frequency of credit reporting errors. 

The Columbus Dispatch has launched a four-part investigation exploring the prevalence of errors in credit reports and the fiendish difficulty of getting them corrected. In fact, the Dispatch finds, “Americans are left virtually powerless to erase the mistakes.”

During a yearlong investigation, The Dispatch collected and analyzed nearly 30,000 consumer complaints filed with the Federal Trade Commission and attorneys general in 24 states that alleged violations of the Fair Credit Reporting Act by the three largest credit-reporting agencies in the United States — Equifax, Experian and TransUnion.

Industry observers say it is among the most comprehensive reviews ever conducted of complaints against credit-reporting agencies.

The complaints document the inability of consumers to correct errors that range from minor to financially devastating. Consumers said the agencies can’t even correct the most obvious mistakes: That’s not my birth date. That’s not my name. I’m not dead.

Nearly a quarter of the complaints to the FTC and more than half of the complaints to the attorneys general involved mistakes in consumers’ financial accounts for credit cards, mortgages or car loans. Houses sold in bank-approved “short sales,” at less than the value of the mortgage, were listed as foreclosures. Car loans that had been paid off were reported as repossessions. Credit cards that had been paid off and closed years earlier showed as delinquent.

As Demos demonstrated in our report, “Discrediting America,” credit reporting errors can have a devastating impact. The Columbus Dispatch found something similar, powerfully documenting “the plight of thousands who, through no fault of their own, have been denied the chance to buy a home or a car, take out a loan for college, rent an apartment, land a job, join the Armed Forces, receive medical care or even open a checking account.”

Even if no error occurred, bad credit may have more to do with unavoidable medical expenses than any underlying character flaw, suggests the New York Times report. Because a growing portion of medical providers’ revenues come directly from patients, the Times finds, doctors and hospitals are turning over more debt to collection agencies, and turning it over more quickly.

FICO, which produces one of the most popular credit scores used by lenders, said it viewed different types of collection agency accounts — medical-related or otherwise — as equally damaging. For someone with a spotless credit history, “it wouldn’t surprise me if their score dropped by 100 points or more [due to a late medical bill],” said Frederic Huynh, a principal analytic scientist at FICO. And the blemish does not entirely disappear for seven years.

Consumer advocates argue that this is unfair. After all, medical debt is usually something people do not volunteer for, and billing errors and figuring out who owes what can often take months…

“You can’t afford to buy a policy, you can’t afford to buy coverage through your job, and you end up in the E.R., and you have to pay for that visit, and even more you have to pay at non-negotiated prices,” said Sara Collins, a vice president at Commonwealth, referring to the fact that the uninsured often pay much more than the rates that insurers negotiate. “So if it becomes part of your credit history, it strikes me as really unfair.”

But good policy could make a difference. The New York Times suggests ways the Medical Debt Responsibility Act and the Affordable Care Act  could help Americans saddled with medical debt. The Columbus Dispatch turns directly to President Obama, who provided a written statement in response to their study, and cites the potential for the new Consumer Financial Protection Bureau to address credit reporting errors. Through legislation or regulation, it’s clear that consumers need all the help they can get.

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