Medical debt is a burden faced by millions of Americans. In fact, a study conducted by The New York Times and the Kaiser Family Foundation earlier this year discovered that 26% of Americans (both insured and uninsured) have suffered severe financial hardship because of struggling to pay their medical bills.
Whether you can’t afford to make payments and are desperately seeking a way to cover those bills or you crave frequent flyer miles, choosing to pay off your medical debt with a credit card can be tempting. Think twice before taking this route, however. You may be discounting these five risk factors.
- Payment Options
Medical bills usually remain absent from your credit report unless the bills are sent to collections. However, they will appear if you put them on a credit card, as this type of spending — no matter what you’re using the money for — is almost always reported to the bureaus. However, you may reduce your risk of credit damage caused by missed payments by considering the benefits of a healthcare provider plan.
- Monthly Payment Options: Healthcare providers regularly offer payment plans for patients, allowing you to budget your debt without hurting your finances.
- Low Interest: Odds are, you won’t be paying the balance off in full each month, so you’ll be charged interest if you pay with a credit card. Medical providers usually charge low or zero interest for balances in repayment.
- Income-Sensitive: Healthcare providers are more apt to consider your income when determining a repayment policy, a factor that can help your financial stability.
- Runaway Balances
You may view credit as the easy solution to your medical debt problem, but it isn’t always that simple. Suppose you have $5,000 in unpaid medical bills. You decide to pay the balance with your plastic to earn rewards points, and then pay the full sum within three months. Unfortunately, a layoff at work takes you by surprise and you cannot afford to make more than minimum payments. The result is a $5,000 balance with an 18% interest rate attached.
- Utilization Imbalance
Debt utilization accounts for 30% of your credit score. Unless you pay off the balance immediately, maxing out your card in favor of a paid debt is likely to hurt your score.
- Negotiation Power
Medical bill balances are overwhelming, but they often aren’t set in stone. Negotiating a lower balance may be possible with a medical audit or simple request. However, negotiating a lower credit card balance requires a settlement or charge off on your credit report, a dark spot that can remain for seven years.
- Long-Term Loss
Maxing out your credit card and risking non-payment will affect your short-term finances, but it’s the long-term consequences that can be even more harmful. Credit is necessary in several important areas of life, from applying for a new phone service to buying a home or car. Good credit opens doors and can save you money in interest and fees; damaging your score will do just the opposite. Review your options carefully when deciding how to repay your medical debt. Today’s choices will impact your future for years to come.