Editorial Policy

Handle Medical Credit Cards with Care

Eva Norlyk Smith Ph.D.

April 11, 2013

When you're in the doctor's office or emergency room facing an unexpected medical cost you really can't afford, an instant-approval medical credit card can seem like a life-saver.

However, medical credit cards, a specialized form of financing offered at hospitals and physician practices, come with an unhealthy amount of fine print.

The appeal of medical credit cards
Even among the insured, out-of-pocket medical costs are high. According to the 2012 Milliman Medical Index, the average insured family of four spends nearly $3,500 out of pocket annually on health care costs. A single emergency room visit can easily dwarf that.

To ease the pain of a lump sum payment, hospitals and physician practices sometimes offer treatment financing options in the form of medical credit cards. As this type of credit card has proliferated, covered services have expanded to include dental work and veterinarian visits.

Terms differ among the cards, but they generally offer an interest-free period, so, assuming you pay down the debt in that time frame, you'll be charged no interest. Another perk is that you can apply for the card from your doctor's office and get approved in minutes. That makes the cards more convenient than getting a regular credit card or applying for a loan from your bank.

The cost of convenience
But while that pamphlet in your doctor's office may make medical credit cards seem appealing, watch out. These cards can come with worse terms than regular credit cards.

Here are some downsides of medical credit cards to look out for:

High interest rates. Many medical credit cards charge steep annual percentage rates (APRs) once the interest-free promotional period expires.. The CareCredit medical credit card issued by GE Capital Retail Bank, for example, starts cardholders off at 26.99 percent APR. The Citi Health Card comes with a whopping 29.98 percent APR. It is important to never use the card for purchases other than what is was intended for as any zero percent promotional APR would not apply to those charges.

Tricky promotional financing terms. Most medical credit cards feature promotional financing plans with either deferred interest or lower interest rates. But there is a catch: For many cards, if you fail to pay the full balance charged to the card by the end of the promotional period, the promotional APR will revert to the standard interest rate. Worse yet, interest may be charged retroactively to the full card balance, starting with the first charge. In other words, you'll get charged interest on the full, original amount of your bill, even if part of the balance has already been paid off.

Depending on your card's penalty terms, the regular APR may also kick in if you don't make your minimum monthly payments on time during the promotional period.

“Most consumers don't understand the fine print,” says Chad Gentry, executive director of mpowered, a Colorado-based credit counseling organization. “If you miss a payment or don't pay it off in full at the end of the period, the interest will backdate in full. When you're at a point of medical emergency, you're not thinking straight anyway. But for people who can't pay for the medical expenses in cash, the odds are high that they will end up having to pay backed-up interest payments on a medical credit card.”

Daily compounding interest charges. The concept of compounding interest can be a shock; essentially, you'll be paying interest on interest. That means the effective interest rate you'll get charged if you don't pay off the balance during the promotional period will be considerably higher than the advertised rate.

Here's why: With CareCredit, for example, interest charges are compounded daily, even during the promotional “interest-free” period. During that promotional period, the interest clock is still ticking, with interest charges being calculated each day, although not added to your balance — yet. As the interest charges pile up behind the scenes, the next day's interest charges are based on the balance plus the previous day's interest charges. It's a snowball effect.

Let's say your promotional period is 12 months, and you fail to pay the balance in that amount of time. Now you owe interest — interest that has been allowed to build up over a year. For each $1,000 charge put on the card, you'd pay $1,309.70 per year, putting the effective APR at 30.9 percent — not 26.99 percent.

Better options
Some medical credit cards offer better terms but may not be widely available. The MedCard Access One Card, for example, available via participating hospitals and health care clinics (primarily in Southern states), offers a one-year interest-free period and a low APR of 9.25 percent. Cards such as the CareCredit card and the Citi Health card also feature better rates, if cardholders sign up for an extended payment plan of at least two years, typically around 15 percent APR. In exchange for that lower APR, you'll have to give up the zero percent introductory period, and you'll be required to make fixed monthly payments for the duration of the plan.

The bottom line, however, is that medical credit cards do not offer better financing terms than regular credit cards other than instant approval. And like any other credit card, carrying a high balance on a medical credit card may hurt your credit score.

Consumers struggling to pay medical bills might do better to look for alternatives that don't involve commercial lenders, Gentry says. Hospitals and doctors may be willing to negotiate payment plans for patients in need. Furthermore, some medical providers may offer “charity care” — free or reduced charges to patients in a financial bind. Instead of simply signing up for a medical credit card, if offered one, be persistent and keep asking for other options.

Ultimately, planning ahead is your best strategy for dealing with medical expenses. Try to tuck away $3,000 to $4,000 (or more) in a medical emergency fund to have something to draw on in the case of future, unforeseen medical expense. Or put some money in a health savings account, which allows you to stash away up to $3,250 ($6,450 for a family) in pre-tax savings a year.

It may seem counterintuitive to stash away so much money you may not need, especially if you have other pressing financial concerns. Yet, unfortunately, for most people, unforeseen medical expenses crop up with an almost predictable inevitability.

Source: Chart information used with permission from CreditCards.com. View original chart here.

Compare your medical credit card options
MedCard Access One
CareCredit Citi Health Card
Wells Fargo
Treatment covered Hospital care, primary care, women's health care, psychiatric services, rehabilitative care Dental, hearing, vision, cosmetic, chiropractic, veterinary Dental, hearing, vision, mobility care, hair restoration, veterinary care Dental, hearing, vision, veterinary
APR 9.25 percent 26.99 percent; 14.9 percent for extended plans 29.98 percent; 15.9 percent for extended payment plans 27.99 percent; 9.9 percent for reduced APR plans
Repayment options 12 months interest free, if you agree to repay the balance in 12 equal installments. Deferred interest:
No interest for 6, 12, 18 or 24 months (varies by provider). Retroactive rate of 26.99 kicks in if you fail to pay the balance in full by the time the interest-free period expires.
Extended payment:
Fixed payments for 24, 36, 48 or 60 months at 14.9 percent APR.
Deferred interest: No interest for 6, 12, 18 or 24 months (varies by provider). Retroactive rate of 29.98 kicks in if you fail to pay the balance in full by the time the interest-free period expires. Extended payment: Fixed payments for 24, 36 or 48 months at 15.9 percent APR. Deferred interest: No interest for period determined by your provider. Retroactive rate of 27.99 kicks in if you fail to pay the balance in full by the time the interest-free period expires.
Reduced APR:
You'll be charged a 9.9 percent APR on balances you roll over month to month.
Fixed payment plan (available at some providers): Pay balance in equal monthly installments, interest free, for between two and three years.
Source: Chart information used with permission from CreditCards.com. View original chart here.