In order to let the debt of the people off the hook, the United States credit investigation company recently came up with a strange method!
In an effort to boost Americans’ credit scores and enable them to take out bigger loans, three of America’s biggest personal credit bureaus have announced plans to wipe tens of billions of dollars of medical debt out of the credit system, foreign media reported.
In the United States, a good credit score is very important for everyone, from buying a car or a house to finding a job. But the global coronavirus outbreak, along with soaring inflation and unemployment, has left households with mounting debt that has tarnished many people’s credit, including massive medical debt.
The US has begun a cycle of interest rate rises to fight the biggest inflation in 40 years, which could in theory combat high prices but will mean higher interest bills for households with debt.
American credit investigation company “debt deletion” to protect personal credit
Equifax, Experian and TransUnion, the three largest credit reporting companies in the US, have jointly announced that they will remove 70% of medical debt from americans’ credit reports in order to improve their credit scores and enable them to apply for higher loans, the Wall Street Journal and other foreign media reported.
On the practical front, the three major credit reporting companies announced that they would begin removing paid medical debts from individual credit records in July. Previously, those debts could remain on a consumer’s credit report for up to seven years, even after they were paid off. In addition, new unpaid medical debt is not added to a credit report for one year after a collection is sent. In addition, medical debts of less than 500 yuan will be removed from individual credit records from the first half of next year, and the threshold may be further raised.
“This is an important step in supporting consumers in the wake of COVID-19,” the three credit reporting companies said in a joint statement. These changes reflect our continued commitment to helping all consumers access fair and affordable credit.” The three largest credit reporting companies in the United States reportedly provide credit reports to more than 200 million American adults every month, covering more than 1.6 billion accounts.
The main reason for this is to avoid the conundrum of Americans having their credit scores lowered because of medical debts and being unable to apply for loans. Medical debt is a huge burden for many Americans, and those unpaid bills end up on credit reports, sometimes lowering consumers’ credit scores and preventing them from getting affordable mortgages, car loans and other credit, the report said.
As of June 2021, Americans had accumulated $88 billion in medical debt on their consumer credit records, according to the Consumer Financial Protection Bureau (CFPB). Mahoney, the Stanford economist, reckons that Americans have accumulated at least $140 billion in unpaid medical debt. Taking into account things like paying off Medical Debt with credit cards, Americans could owe as much as $1 trillion in Medical Debt, or 4% of U.S. GDP in 2021, according to Sesso, executive director of Medical Debt.
Data from February, also from the CFPB, show that 58% of third-party debt collection transactions in the U.S. in 2021 were for medical debt, the highest number, while the second largest collection was for telecommunications debt, accounting for just 15%. In other words, medical debt has become the largest source of debt collection in the United States.
However, debt does not disappear into thin air, and the practice of wiping the credit history of medical debts by American credit bureaus does not solve the debt problem at all, but only allows the debtors to continue borrowing.
Household debt rose sharply
In fact, medical debt is only a microcosm of American household debt. With the pandemic spreading around the world, as well as rising inflation and unemployment, American households are taking on more debt.
According to a February report by the Federal Reserve Bank of New York, total household debt rose by $1.02 trillion in 2021 to $15.58 trillion, the biggest increase since 2007. Household debt rose by $333bn in the fourth quarter of last year alone.
The report notes that mortgages and auto loans are the main drivers of household debt growth. Specifically,
Average U.S. home prices rose nearly 20% in 2021, and more than $4.5 trillion in new home mortgage approvals were the highest since the category was first reported in 1999. Mortgage debt rose by $258bn in the fourth quarter alone to $10.93tn at the end of December.
Then there was the increase in auto loans from higher new and used car prices: $734 billion in new auto loans in 2021, the largest in the Fed data, and total auto loan debt rose to $1.46 trillion by the end of December.
And more credit card debt: Americans added $52 billion to their credit card balances in the fourth quarter, the largest quarterly increase in the 22 years that data have been kept.
“Americans have never been so heavily in debt.” CNN reported that the “sweetener” from the stimulus package during the pandemic has faded and consumers are returning to credit cards. “The past year and a half has been tough for the millions of Americans who have lost their jobs,” said Sarah Ratner, a credit card expert at a U.S. fintech firm. Now we are faced with rising costs for urgently needed items such as food, housing, gasoline, transportation and health care.”
Higher debt burdens could put more pressure on HOUSEHOLDS as COVID-19-related insurance programs wind down, commodity prices climb and interest rates continue to rise, according to the New York Fed’s analysis. The CNBC report cites a new poll showing that more than a third of respondents say their family’s financial situation has gotten worse in the past year. About 56 percent of Americans don’t have enough savings to pay a $1,000 emergency bill, according to a January bank rate survey.
Us inflation is at its highest level in nearly 40 years. To fight inflation, the Federal Reserve has begun a cycle of interest rate hikes. And the market expects the Fed to raise rates probably six more times this year. But for indebted Americans, especially those using credit cards, higher rates also mean interest rates could rise, further burdening households.
Christian Weller, a senior fellow at the Center for American Progress, noted that American households are getting deeper into debt and even more at financial risk. “Households are also likely to face a sharp rise in interest rates on their outstanding debt as the Federal Reserve prepares to gradually raise interest rates. A combination of multiple financial risks rising at the same time would be harmful for many American households.”