A lot of personal finance advice falls into the "easier said than done" category, particularly when it comes to managing debt. For example, most people know it can be costly to carry a balance on their credit card. Unfortunately, sometimes that still feels like their only option. Credit cards can be a convenient way to access money quickly.
For example, if you get hit with an unexpected medical bill, you might reach for your card because you don't know what else to do. If this is your situation, I am sorry you are going through this. The uncertainty and pain of health problems is hard enough without throwing financial stress on top of it all.
Think twice before putting medical bills on your credit card
Rising health costs are an issue for many Americans, both insured and uninsured. According to a 2022 report from KFF, over 40% of Americans have medical or dental debt. Worryingly, 24% said they have medical bills they can't pay.
If you're trying to work out how to handle a medical bill and don't have money in your savings or health savings account, try not to reach straight for the plastic. It is worth exploring other forms of payment. While using your credit card could earn you rewards points, it may also have some unintended consequences.
1. Paying medical bills on a card can impact your credit
In the eyes of the credit rating agencies, not all debt was created equal. For example, unlike other forms of debt such as mortgages or personal loans, your credit card balance can impact your credit utilization ratio. Your utilization ratio is the percentage of the available credit you're using and is a key factor when calculating your credit score. The ideal is to keep your ratio below 30%. If the limits on your cards add up to $10,000, and your balance is $7,000, you'd have a ratio of 70%.
There's another consideration here. Recent years have seen big changes in how medical debt is handled on credit reports. The bureaus won't include certain unpaid medical debts on your credit report at all. This applies to medical collections that are under $500, and or medical collections that are paid or are less than a year old. The Consumer Financial Protection Bureau (CFPB) wants to go even further and remove all medical bills from credit reports.
But these changes and exceptions do not apply to credit card collections, even if the debt came from paying a medical bill.
Actionable takeaway:
If you pay your medical bill with a card, the credit bureaus will categorize it as credit card debt, not medical debt. If you can't pay it down straight away, this will have a direct impact on your credit score. Moreover, the policies for recording overdue medical payments on your credit report are more favorable when it is a medical debt.
2. There may be a less expensive way to borrow
One of the attractions of a credit card is that you can use it straight away. If you're trying to deal with the stress of an unexpected health crisis, this can be a big factor. There've certainly been points in my life where I used my credit card because it was the easiest route, even though I knew it would cost me more.
If you have the brain space to explore other options, it really could save you money. According to Forbes, average credit card interest had reached almost 30%, as of Dec. 11. In contrast, rates on some of the top personal loans can be less than 10%. Even better? You might be able to negotiate an interest-free payment plan with your medical provider.
Let's say you need to pay a $1,500 medical bill.
Our credit card interest calculator shows that if you paid it down by $100 a month at a 30% APR, it would take 19 months to pay off and you would pay over $400 in interest.
Our personal loan calculator shows that a $100 monthly payment on a personal loan at a 10% APR would see you paying around $100 in interest. You'd have the debt repaid in 16 months.
Actionable takeaway:
There are a few different ways to finance medical expenses. Before you use your credit card to pay a medical bill, look into alternatives with lower interest rates.
Your medical provider may let you pay in installments through a payment plan. Talk to the billing office to see what you can work out. Be sure to check any fees and interest charges.
A personal loan may offer more favorable terms, especially if you have a good credit score. You may be able to access the money relatively quickly without too much hassle or paperwork.
3. You might be able to get financial assistance
If you can get help paying the bill, you may not need to borrow money at all. There are a number of assistance programs out there that may be able to help with at least some of the costs of medical care. If you're not sure where to start, talk to your healthcare provider. You might also see if you can find a patient advocate who could advise you on next steps.
Actionable takeaway:
Ask the hospital if it offers any financial assistance or charity care programs. Find out what the eligibility requirements are and what you need to do to apply. If your medical provider can't help, see whether you qualify for state or federal assistance. You may also be able to get help elsewhere. Benefits.gov has a comprehensive list of healthcare and medical assistance programs.
4. You might not owe as much as you think you do
Whatever form of payment you use, ask to see an itemized bill and check it carefully. According to KFF, over 40% of people think they've found a mistake on a medical or dental bill they received.
On top of which, medical bills can be a bit like marketplaces when you're on holiday -- different people get charged different amounts. Sometimes uninsured patients will pay more than insured ones, so see if you can research the going rate for the service you received.
Actionable takeaway:
Medical bills can be confusing, but don't assume the details are correct. Check yours, particularly for things like double entries or charges for services you didn't receive. Even if the information is error free, don't be afraid to negotiate. One expert told NPR you might be able to get the total down by between 30% and 50%. If you're looking at a $2,000 bill, that's between $600 and $1,000.
Treat your credit card as a last resort
Medical bills really can rub salt in the wound of whatever health issues you are facing. It's understandable to want to resolve the payment quickly, but if you're able to take a bit longer, it might make life easier further down the road. Not only could you pay less, you could also protect your credit score.
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