Image AI-generated, courtesy of Antonio Graceffo
In yet another socialist, populist move to win votes, Kamala Harris has said that she wants to remove medical debt from credit scores, claiming it will help poor working families already struggling with debt to borrow more money. However, this policy is not only harmful to those families but could also have catastrophic consequences for the economy. Credit scores include all types of debt for a reason—because the total debt load determines a person’s ability to repay additional loans. Excluding certain debts from the calculation would create an inaccurate score, leading to more defaults and greater financial instability.
This is a terrible idea because it incentivizes financial irresponsibility, distorts the financial picture for lenders, could shift healthcare costs upward, neglects the root causes of medical debt, and may result in tightened lending standards or increased interest rates for all borrowers. At the end of the day, forcing banks to loan to people who cannot afford to repay their loans was the catalyst for the 2008 global financial crisis.
By removing medical debt from credit reports, this policy risks incentivizing financial irresponsibility. Without the pressure of seeing medical debt impact their credit scores, individuals may be less motivated to manage their debt responsibly, resulting in delayed or ignored payments. Over time, this could actually increase the amount of medical debt instead of reducing it, as individuals might feel less urgency to pay off what they owe. This shift in behavior could exacerbate the very problem the policy aims to address.
Moreover, excluding medical debt from credit scores distorts the full financial picture lenders need to make informed decisions. Credit scores are designed to reflect an individual’s ability to manage and repay all debts, giving a complete view of their financial health. Removing medical debt hides a significant portion of a person’s financial obligations, leading lenders to approve loans for individuals whose financial situations may be far less stable than they appear. This could increase the risk of defaults and potentially destabilize lending practices, much like what occurred in the lead-up to the 2008 financial crisis.
Another unintended consequence of this policy could be cost-shifting within the healthcare system. Medical providers may respond to this change by increasing healthcare service costs or adopting more aggressive debt collection practices to make up for the diminished leverage over patients. If medical debt no longer affects credit scores, providers might face greater challenges collecting payments, pushing them to raise prices for everyone, which would counteract the intended benefits of the policy.
This proposal also neglects to address the root causes of medical debt, such as skyrocketing healthcare costs. Simply removing medical debt from credit reports doesn’t resolve the underlying financial strain that leads to debt accumulation in the first place. Families would still face high medical bills, even if those bills no longer impact their credit scores, leaving the core problem unaddressed.
Finally, lenders may react to this policy by tightening their lending standards or raising interest rates to compensate for the reduced transparency in borrowers’ financial profiles. As a result, individuals—especially those with lower credit scores—could find it harder to secure loans or face higher borrowing costs. This shift would ultimately harm the very people the policy is intended to help by making credit less accessible.
The proposal to remove medical debt from credit scores has parallels to the changes in federal mortgage lending rules before the 2008 financial crisis. Leading up to the crisis, banks were incentivized or pressured to issue loans to individuals with poor credit histories or low incomes—people who, under normal circumstances, would not qualify for mortgages based on their financial standing. This was largely due to policies aimed at increasing homeownership, even among those who were not financially equipped to sustain mortgage payments.
In the early 2000s, federal policies, combined with a push from Fannie Mae and Freddie Mac, encouraged lenders to offer subprime mortgages, often to borrowers with low credit scores. These loans were risky, and many borrowers eventually defaulted. When a large number of these defaults occurred simultaneously, it triggered the collapse of the housing market, which played a major role in causing the 2008 financial crisis.
Similarly, by removing medical debt from credit scores, the government risks creating a distorted picture of individuals’ financial health. Just as in the mortgage crisis, where risky borrowers were given loans based on misleading or incomplete assessments, removing medical debt could lead to individuals being granted credit or loans that they are not in a strong financial position to repay. This could result in a rise in defaults and broader economic instability.
In both cases, the intention—whether promoting homeownership or alleviating the burden of medical debt—was well-meaning, but the policy could lead to unintended and destructive consequences if it distorts financial risk assessments and encourages lending to people who may struggle to meet repayment obligations. History has shown that such financial distortions can have long-lasting, negative effects on the economy, as demonstrated by the 2008 financial meltdown.
While the intention is to relieve the financial burden, critics argue that this approach may overlook the long-term financial discipline and economic realities involved, ultimately harming both borrowers and the economy as a whole.
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