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Millions of debt collections dropped off Americans' credit reports

Tens of millions of debt collections disappeared from Americans’ credit reports during the pandemic, a new government watchdog report found, but overdue medical bills remain a big strain on many households nationwide.

The total number of debt collections on credit reports dropped by 33% from 261 million in 2018 to 175 million in 2022, according to the Consumer Financial Protection Bureau, while the share of consumers with a debt collection on their credit report shrunk by 20%.

Medical debt collections also dropped by 17.9% during that time, but still made up 57% of all collection accounts on credit reports, far more than other types of debt combined — including credit cards, utilities, and rent accounts.

Despite the reduction in collections, the CFPB noted that the results underscore ongoing concerns that current medical billing and collection practices can lack transparency, often hurting the credit scores and financial health of those most vulnerable.

“Our analysis of credit reports provides yet another indicator that, due to a strong labor market and emergency programs during the pandemic, household financial distress reduced over the last two years,” Rohit Chopra, CFPB director said in a statement. “However, false and inaccurate medical debt on credit reports continues to drag on household financial health.”

Signage is seen at the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., (Credit: Andrew Kelly, REUTERS)
Signage is seen at the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., (Credit: Andrew Kelly, REUTERS) (Andrew Kelly / reuters)

Having a debt in collections means your original creditor sent your debt to a third-party agency to collect it. According to the CFPB, common items that can slip into collections include medical debt, student loans, unpaid credit card balances and rent, to name a few.

Once in collections, these debts can stay on your credit report for up to 7 years, Experian noted, potentially harming your chances of gaining access to new credit in the future.

While pandemic-era stimulus benefits may have helped families reduce some of their overall debt, the CFPB noted that the decline in collections was mainly due to some debt collectors underreporting data.

According to the report, debt collectors — particularly those who primarily collect on medical bills — reported 38% fewer collection tradelines from 2018 to 2022. Chopra noted this could be troubling.

A woman is collecting post at home in her mailbox in Australia. She is smiling and  picking-up her mail. She is looking at the letters she received.
(Photo: Getty Creative) (Onfokus via Getty Images)

The “decline in collections tradelines does not necessarily reflect a decline in debt collection activity, nor an improvement in families’ abilities to meet their financial obligations,” he said, “but a choice by debt collectors and others to report fewer collections tradelines, while still conducting other collection activities.”

Fortunately, a growing share of Americans may see even more medical debt disappear from their credit history this year, helping to improve their creditworthiness.

In the first half of 2023, Equifax, Experian, and TransUnion will no longer include medical debts under the amount of $500 on credit reports. That followed the credit bureaus’ move last year to remove approximately 70% of medical collection debt tradelines from consumer reports. Additionally, unpaid medical debt would take a year — rather than the current six months — to show up on a person’s credit report, the bureaus said.

About two dozen people eventually filled the
About two dozen people eventually filled the "Debt and Collections" courtroom in Poplar Bluff, Missouri. Many of the cases on the docket involved medical debt. (Credit: Michael S. Williamson/The Washington Post via Getty Images) (The Washington Post via Getty Images)

Those upcoming changes may still be just a drop in the bucket toward reducing medical debt, Chopra said.

“While this will reduce the total number of medical collections tradelines, an estimated half of all consumers with medical collections tradelines will still have them on their credit reports,” Chopra said in the report, “with the larger collection amounts representing a majority of the outstanding dollar amount of medical collections remaining on credit reports.”

The CFPB analysis builds on the Biden-Harris Administration’s aim to strengthen the Affordable Care Act and implement new consumer protections to reduce the burden of medical debt and lower medical costs.

It also follows a string of CFPB reports citing how inaccurate medical debt tradelines could not only unfairly harm consumers’ credit scores, but also create long-term repercussions such as avoidance of medical care, risk of bankruptcy, or difficulty securing employment.

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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