‘Positive’ medical debt credit reporting is a Trojan horse

A bill recently introduced to allow for positive reporting of medical debt payments might sound good on paper. In reality, it's not likely to benefit consumers. It could even end up harming them.

The Reporting Medical Debt Payments as Positive Consumer Credit Information Act of 2024 is a Trojan horse, with hidden traps and backward steps for consumers. One of the biggest problems with the bill is that it simply doesn’t do much to help consumers. Medical debt is almost always reported by debt collectors, so it shows up as a collection item — something viewed as inherently negative.

Moreover, even if medical bills were to show up as regular credit accounts instead of collection items, the reporting medical debt payments would not help boost credit scores because of the way scores are calculated.

If reported as regular credit accounts, medical bills would show up as newly established accounts with short histories — two important factors in credit-scoring models. Like other accounts with these characteristics (such as Buy Now, Pay Later credit), they might end up hurting a credit score more than helping.

This bill appears to be an effort to beat back the Consumer Financial Protection Bureau’s proposed rule prohibiting medical debts from appearing on credit reports. Consumers are much better protected by the CFPB’s proposal than by a law that purports to allow positive reporting but could result in negative reporting if the consumer misses one or more payments.

The bill doesn’t prohibit reporting negative information about medical debts, and debt collectors reporting on-time payments are likely to report missed payments as well.

There is no legal need for this bill. The bill’s sponsors imply that there is currently some sort of statutory limitation against reporting positive payments on medical bills to credit reporting agencies, claiming the bill intends to “reverse federal law.” But there is no such limitation.

In fact, medical debts already did show up as paid on consumers' credit reports prior to a voluntary change made by the Big Three credit bureaus (Equifax, Experian, and TransUnion) in 2022 to stop reporting paid medical debt.

Even worse, this bill could cause harm to consumers by preempting recently passed state laws that ban medical debts from appearing on credit reports. Nine states have passed such laws, including California, Connecticut, Colorado, Illinois, Minnesota, New Jersey, New York, Rhode Island and Virginia. If this bill becomes law, debt collectors and the credit reporting industry will likely argue in court that the federal law overrides these state laws.

Efforts to promote reporting of “alternative data,” such as rent or subprime credit, often serve the interest of the credit reporting industry and other powerful lobbies (including landlords and payday lenders) more than they do consumers. This proposal is no different.

Instead of feeding more information to the data hoarders that are the credit bureaus, we should be looking at new, innovative ways of assessing creditworthiness that provide competition to the Big Three and give consumers more control over our data.

Congress shouldn’t be fooled and let a Trojan horse hurt consumers by nullifying state laws and the CFPB’s effort to get medical debt off credit reports.

Chi Chi Wu is senior attorney at the National Consumer Law Center.