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There are a lot of logistics to coordinate when you need medical care. Between finding the right doctor, arranging childcare and taking time off from work, it can seem like recovery is the least of your worries when it should be the priority. To make matters even more complicated, you may also need to find a way to cover the cost of your medical bills.
A recent study by Raymond Kluender of Harvard Business School found that 18% of Americans have medical debts in collection. So if you are feeling the stress of medical bills that you cannot afford to pay, it might give you comfort in knowing that you are not the only one facing this type of financial challenge.
Medical bills can be problematic even if you have a strong budgeting system, as most medical bills are unforeseen expenses. Even with insurance coverage in place, your medical or Medicare insurance may not cover the full cost of your medical expenses. For example, a study from the American Journal of Preventive Medicine found that the average Medicare patient was responsible for nearly $ 1,000 in out-of-pocket expenses after hospitalization for the flu.
It is normal to feel pressured to cover initial or ongoing medical costs. But you might 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 bills makes sense, but often times it’s probably 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 your medical expenses.
High interest and fees
The annual percentage rates (APRs) that you pay on your credit card debt may 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 rate accounts). If you have rewards credit cards or don’t have the best credit score, it’s not uncommon for your credit card’s APR to be above the national average.
With credit cards, you can avoid paying interest if you pay off your entire statement balance each month. But if you rotate a balance from month to month, those high interest charges kick in and can be a big expense. If you can’t afford to pay a medical bill right away, it’s not wise to charge the charges to your credit card account.
Potential damage to credit score
When your credit card balances are high relative to your credit limits, your credit utilization rate may increase.
For example, billing a $ 3,000 medical bill on a card with a $ 3,000 limit (and no pre-existing balance) would maximize your account and put you at a 100% usage rate on that card.
A high credit utilization rate is not good for your credit score. In fact, even if you pay your bill on time without fail, high usage can negatively impact your credit score. This potential problem is another reason why you should probably avoid paying expensive medical bills with a credit card unless you can afford to pay the entire bill by the due date.
There may be better options
If you need to fund a medical bill, there are usually better options than your credit card account. Of course, withdrawing a credit card might be the easiest solution, but the cost (both financially and credit score) is high when you take this approach. Instead of paying with a credit card, you might want to consider another financing option.
Many health care providers are willing 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 payout amount if the original offer is more than you can afford. If you build a payment plan that fits your budget, you might even want to set up recurring automatic 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 instead of revolving accounts like credit cards, which means it won’t impact your revolving usage rate. So even if you owe a large amount, the debt itself is likely to have little or no impact on your credit score. (Note: Your payment history on a personal loan will always be as important as it is on any other credit obligation.)
4 reasons you might want to 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 benefits to paying medical bills with a credit card. Here are four reasons you might want to use a credit card for medical expenses that you can afford to pay right away.
Credit card rewards
Rewards credit cards give you the ability to earn points, miles, or cash back on any purchases you need to make anyway. It’s good to take these perks into your daily spending, but points and miles enthusiasts are often looking for ways to boost their point earning potential. Unexpected expenses like medical bills can represent opportunities to earn more rewards.
You might have the funds in savings (or elsewhere in your budget) to directly pay for a medical expense. If you use a rewards credit card to pay your health care provider, you may get an additional benefit from the purchase.
The key to getting the most out of your credit card rewards, of course, is managing your accounts wisely. Best practices for managing credit cards require that you pay your bill on time and in full every month. Otherwise, the interest you pay (and the potential damage to your credit score from a credit card default) could wipe out any rewards you could earn on the account.
Credit cards are a convenient way to pay medical bills and a wide variety of other costs. Rather than sending a check or visiting a medical provider to pay in person, credit cards give you the option of paying over the phone or online.
Debit cards can offer this same level of payment convenience. However, there are some drawbacks to a debit card in the fraud protection service which we will discuss 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 report the fraud correctly within 60 days and many credit cards offer a fraud liability of 0. $.
Debit cards also offer protections against fraud through the Electronic Funds Transfer Act. But the protections are not so strong. Your liability could increase to $ 500 if you fail to report the loss or theft of a debit card within two days.
The bank may also deduct unauthorized debit card transactions from your account immediately when debited. Depending on the situation and the bank’s policy, the bank may not credit your account with the fraudulent debit until its investigation is completed. Meanwhile, if you have any other bills and expenses due, you’ll need to figure out how to cover them until the bank returns your stolen funds.
Short term loan
Because credit card accounts have interest-free grace periods, some people use their card as a short-term loan. Here is how it works.
Your credit card billing cycle can be from 28 to 31 days, depending on the number of days in a given month. At the end of the billing cycle, your credit card company will issue a statement. At this point, you will have at least 21 days (your grace period) until your invoice is due. As long as you pay the full statement balance by the due date, you can avoid paying interest charges on your expenses, including medical bills.
It should be noted 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 arrives and you do not pay the balance, interest charges will apply.
If you don’t have enough money in savings or in your budget to cover your medical bills, charging those expenses to a credit card is dangerous. You risk wasting money on interest charges and damaging your credit score with this approach to medical debt management. Plus, there are more affordable ways to finance your medical debt.
Whichever way you decide to pay your medical bills, make sure you don’t ignore them. If you default, those debts could end up on all three of your credit reports as collection accounts after 180 days. Collection accounts, even the medical variety, have the potential to damage your credit scores and could hurt your chances of getting approved if you need to apply for financing in the future.