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There are many logistics to coordinate when you need medical care. Between finding the right doctor, arranging child care, and taking time off work, you may feel that recovery is the least of your worries when it should be the priority. To make things more complicated, you may also need to know how to cover the cost of your medical expenses.
A recent study led by Raymond Cloinder of Harvard Business School found that 18% of Americans have group medical debts. So, if you’re feeling the stress of medical bills that you can’t afford, it may comfort you to know that you’re not the only one facing this kind of financial challenge.
Medical bills can be a problem even if you have a robust budgeting system because most medical costs are unplanned expenses. Even with insurance coverage, Medicare or Medicare may not cover the full cost of your medical expenses. For example, a study by the American Journal of Preventive Medicine found that the average Medicare patient was responsible for nearly $1,000 in out-of-pocket costs after being hospitalized.
It’s normal to feel pressured to incur up-front or long-term medical expenses. But you may want to think twice before pulling out your credit card to pay those bills. There are times when using a credit card to pay for medical expenses makes sense, but often, it’s best to leave the credit card in your wallet.
3 reasons to avoid paying medical bills with a credit card
Sometimes paying medical bills with a credit card is a bad idea. Here are three reasons why you should avoid using a credit card account for medical expenses.
High interest and fees
The annual percentage rates (APRs) you pay on your credit card debt can be higher than other types of financing. According to the Federal Reserve, the average credit card interest rate was 14.61% in May 2021 (for interest assessment calculations). If you hold rewards credit cards or if you don’t have the best credit rating, it’s not unusual for your credit card’s APR to be higher than the national average.
With credit cards, you can avoid paying interest if you pay off your entire statement balance each month. But if you roll a balance from month to month, those high interest fees kick in and can be a big expense. If you can’t pay a medical bill right away, it’s not wise to put the charge on your credit card.
Possible damage to credit score
When your credit card balances are high in relation to your credit limits, your credit utilization may increase.
For example, charging a $3000 medical bill on a card with a $3,000 limit (no pre-existing balance) will maximize your account and put you at 100% utilization on that card.
A high credit utilization ratio is not good for your credit score. In fact, even if you pay your bill on time without fail, high usage can have a negative impact on your credit score. This potential problem is another reason why you should skip paying your costly medical bills with a credit card, unless you can pay the bill in full when the due date arrives.
There may be better options
If you need to fund a medical bill, there are usually better options available than your credit card account. Sure, taking out a credit card might be the easiest solution, but the cost (from a financial and credit point of view) is high when this approach is taken. Instead of paying with a credit card, you may want to consider an alternative financing option.
Many medical providers want to offer an interest-free or low-interest payment plan. You can call the hospital or doctor’s office to discuss your options. Don’t be afraid to ask for a lower payment amount if the initial offer is more than you can afford. If you’re working on a payment plan that fits within your budget, you may want to set up automatic recurring payments (if available) to make sure you don’t accidentally miss a due date.
A personal loan is another option that usually offers a lower interest rate than credit cards. Personal loans are also installment accounts rather than revolving accounts like credit cards which means they won’t affect your recurring rate. Therefore, even if you owe a large amount, the debt itself will likely have little or no effect on your credit score. (Note: Your payment history on a personal loan will still matter as much as any other credit commitment.)
4 reasons why you should use a credit card to pay medical bills
If you have the ability to pay your medical bills and other credit obligations, there are some perks to paying medical bills with a credit card. Here’s a look at four reasons why you might want to use a credit card for medical expenses that you can pay off right away.
Credit Card Rewards
Rewards credit cards give you the ability to earn points, miles, or cash back on purchases you need to make anyway. It’s fine to reap these benefits from your daily spending, but points and miles enthusiasts often look for ways to amplify their points-earning potential. Unexpected expenses such as medical bills can present opportunities to earn more rewards.
You may have money in savings (or somewhere else in your budget) to pay for medical expenses directly. If you use a rewards credit card to pay for your medical provider, you can get additional benefit from the purchase.
The key to making the most of your credit card rewards, of course, is to manage your accounts wisely. Credit card management best practices dictate that you pay your bill on time and in full each month. Otherwise, the interest you pay (and potential credit score damage from a credit card delay) could wipe out any rewards you might earn on the account.
Ease or convenience
Credit cards are a convenient way to pay medical bills and a variety of other fees. Instead of mailing a check or visiting a medical provider to pay in person, credit cards give you the option to pay over the phone or online.
Debit cards may offer the same level of payment convenience. However, the debit card has some flaws in the fraud protection section which we will cover next.
Credit cards are perhaps the safest way to pay for purchases – in person, online, or over the phone. The Fair Credit Billing Act (FCBA) limits your liability for unauthorized credit card transactions to $50, provided you correctly report the fraud within 60 days and many credit cards offer a $0 fraud liability.
Debit cards also provide fraud protection through the Electronic Funds Transfer Act. But the protection is not strong. Your liability can jump to $500 if you fail to report a lost or stolen debit card within two days.
The bank may also deduct unauthorized debit card transactions from your account immediately when they are loaded. Depending on the situation and the bank’s policy, the bank may not credit your account for the fraud charge until the investigation is complete. Meanwhile, if you have bills and other expenses due, you’ll have to figure out how to cover them until the bank returns your stolen money.
short term loan
Because credit card accounts feature interest-free grace periods, some people use their card as a short-term loan. Here’s how it works.
Your credit card billing cycle can range from 28 to 31 days, depending on the number of days in a given month. When the billing cycle ends, your credit card company will issue a statement. At this point, you will have at least 21 days (the grace period) until your bill is due. As long as you pay the full statement balance by the due date, you can avoid paying interest charges on fees — including medical bills.
It’s worth noting that you should only use your credit card as a short-term loan if you are sure you have the funds available to pay your balance in full by the due date. If the due date has arrived and you have not paid the balance, interest charges will apply.
If you don’t have enough money in savings or budget to cover medical bills, it’s dangerous to put those charges on a credit card. You risk wasting money on interest charges and damaging your credit score with a medical debt management approach. Additionally, there are more affordable ways to fund your medical debt.
No matter how you decide to handle your medical bills, make sure you don’t ignore them. If you default, these debts may end up on all three credit reports as collection accounts after 180 days. Collection accounts, even of the medical type, have the potential to damage your credit score and can harm your prospects for approval if you need to apply for financing in the future.