Medical debt is often seen as a barrier to accessing credit, but a new study suggests otherwise. According to the National Bureau of Economic Research, canceling medical debt has minimal impact on credit scores and credit limits. Surprisingly, those who had their debt forgiven fared worse in credit outcomes compared to those with sizable debt.
The study, The Effects of Medical Debt Relief: Evidence from Two Randomized Experiments, found that medical debt relief immediately raised credit scores by an “economically small” 3.6 points on average. That figure was a little better for respondents who had no other debt in collections, with a 13.4 point increase.
For overall credit limits, those who received debt relief saw a gradual increase of $342 on average, while the control group—consisting of people whose debt wasn’t eliminated—saw their credit limits increase by an average of $2,227.
The researchers studied a group of 83,400 individuals who collectively had $169 million in debt forgiven. Among them, the average debt per person was $2,167. These individuals’ outcomes were contrasted with those of a control group consisting of 68,014 individuals who continued to be pursued for repayment by a debt collector.
The study also noted that debt relief had no significant effect on credit card and auto loan borrowing, though these findings were considered “statistically insignificant and economically small.”
Chipping Away at the Issue
The impact of medical debt on credit has evolved in recent years. Historically, debt collectors have used medical debt as a kind of cudgel. They could offer to stop reporting a borrower’s debt to the credit bureaus as a means of encouraging repayment.
But the concerns about data integrity and associated legal risks from inaccurate reporting has led to a substantial drop in the reporting of debt information by debt collectors. Credit bureaus have also agreed to disregard medical debt amounts under $500 or less than a year old. In March, a group of Democratic senators asked the reporting bureaus to stop collecting medical debt altogether.
As a result, the percentage of adults with medical debt in collections has declined from 16% in 2018 to 5% by August 2023.