The three major credit reporting agencies maintain dossiers on 200 million Americans that are used to decide who gets a mortgage or a car loan and what the loan will cost. Negative information in a borrower's file can mean higher interest rates or can disqualify the applicant completely. Yet according to a recent report from the Consumer Financial Protection Agency, more than half of all the collection activity reported to the credit bureaus involves medical debt rather than a mortgage or consumer loan default.
While it is always the responsibility of the individual to monitor and resolve unpaid doctor bills, the credit bureaus are recognizing the potential for delays in insurance compensation and are cutting debtors some slack. Last Monday, the three major agencies announced they will observe a 180-day grace period before reporting delinquency in medical debts to allow time for insurance claims to process and settle.
And if you already have negative information on your record from a previous bill, you might get a do-over. If a medical debt in arrears is ultimately paid by the insurance company, the reporting agencies will delete the negative information from your credit report.
The changes are part of a significant recalibration announced by the Consumer Data Industry Association, a trade group that represents data firms Transunion, Experian and Equifax. Consumer advocacy groups have long argued for the changes, but the final impetus came from negotiations between the agencies and the New York Attorney General's office.
The change in handling of medical debts follows a similar move by Fair Isaac Corp. last summer to reduce the weight of defaulted medical bills in the computation of the ubiquitous FICO score used by most lenders in credit evaluations.
Meanwhile, in a nod to the increasingly widespread problem of identity theft, the new plan includes beefed-up dispute resolution mechanisms. Consumers who find erroneous information will have their claims reviewed by trained credit investigators with an eye toward improving accuracy and correcting or erasing fraudulent transactions arising from ID theft or data breaches.
Given the importance of credit records and their impact on consumer borrowing capacity, it is important to review your file periodically and take prompt action to correct erroneous information. Each of the three agencies offers one free copy of your credit report each year. Visit www.annualcreditreport.com to create a login and request your free report for each agency. Note that this is the only official source for free reports; other sites run by the reporting firms require a credit card and attempt to sell monitoring services.
Soon the annual credit report site will include additional educational material as well as more information on how to dispute errors. According to the Federal Trade Commission, one fifth of all consumers have at least one mistake in their credit file, so it pays to check. Follow the instructions on the site to challenge any factually incorrect items. And avoid so-called "credit repair" companies; you can accomplish the same corrections yourself at no cost, and no one can fix a bad report that is actually correct. Any magical intimation to the contrary is a violation of federal law.
The credit bureaus have not always been particularly helpful in amending erroneous data. In fact it took an act of Congress in 2003 to open up consumers' credit files for their owners to review. Today, the agencies have come to recognize that accurate reporting is in their best interest, and have taken commendable actions (thanks to a little prodding from New York State) that are clearly in consumers' interests.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager at Barnett & Co.