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Why You Should Never Put Medical Debt on a Credit Card

Elizabeth Aldrich, The Motley Fool

Medical bills are now the No. 1 reason Americans file for bankruptcy. It's no surprise, especially since the average cost of an emergency room visit is in the thousands, and that doesn't even take into account diseases and chronic illnesses that require ongoing treatment.

Stack of bills that say account closed and past due in red letters.

Image Source: Getty Images.

If you find yourself beneath a pile of hospital bills that you can't pay, you're not alone. You may be tempted to simply swipe your credit card and pay it all off, but swapping medical debt for credit card debt is almost never a good idea. Here's why.

Medical debt may not affect your credit score

Hospitals and doctors don't report your medical bills to credit-reporting agencies. Until your medical debt goes unpaid long enough to be sent to collections, it won't affect your credit score, even if you make a late payment.

Once your medical bills are sent to collections, a new law requires that Experian, Equifax, and TransUnion wait a full 180 days before including that medical debt on your credit report. This gives you six months to sort out a payment plan before your score takes a hit. Once that period is up, newer credit-scoring formulas won't weigh your medical debt as severely as they would credit card debt, and paying it off may even get it cleared off your report entirely.

On the other hand, credit card debt is arguably the worst kind of debt for your credit score, and it impacts your score immediately. Paying off medical bills with your card will cause an increase in your credit utilization ratio, and late payments will show up on your credit report.

Medical providers offer lower interest rates

Credit card debt is generally the most expensive form of debt. Medical debt, on the other hand, comes at a much lower price tag -- especially if you qualify for financial assistance.

Many hospitals, particularly non-profits, offer financial assistance to people who are uninsured, or people who are insured but facing steep medical bills they cannot afford. In addition to charging lower interest rates, these programs may even offer no-interest repayment plans.

It's harder to negotiate with credit card issuers

Is it possible to negotiate interest rates, late fees, and even repayment terms with your credit card provider? Yes, it is. Are they likely to budge enough that a significant financial burden will be lifted? Probably not.

Medical providers are more flexible. Hospitals often will work with you to negotiate payment plans that work for your income. You can also double down by negotiating with both your medical provider and your health insurance provider, as health insurance providers will sometimes deny coverage initially but then reverse that decision if you can show that your policy should cover the expense.

Even if your debt is in collections, collectors pay much less than what you owe to collect your medical debt (think pennies on the dollar), so they have more room to negotiate than credit card issuers. Often, you'll end up paying only a fraction of what you actually owe to settle the debt.

Your medical debt can be forgiven

If you qualify for a hospital's financial-assistance program, you may be able to have a portion -- or all -- of your medical debt forgiven. Simply contact the billing department at your medical provider to ask them what kind of financial assistance they offer and how you can qualify. Your hospital may also have charity programs in place, and even state and local governments sometimes offer grants to assist with medical-bill repayment.

Paying off medical debt with a medical credit card

Instead of a payment plan, some medical providers may offer you a medical credit card. Often, these credit cards will come with a six- or 12-month interest-free financing period, so they seem like a great deal. However, if you fail to pay off all of your debt within that introductory period, you'll be charged interest rates that match, or sometimes are even higher than, regular credit cards. CareCredit, a major medical credit card provider, charges an APR of 26.99%, which is just about as high as it gets.

Even if you think you can pay off your debt quickly, you could always find yourself saddled with additional medical expenses or unexpectedly getting laid off. Paying off medical debt with a credit card is always risky, and there's really no reward.

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