Considering a Medical Credit Card? Proceed with Caution

Medical emergencies drain your time, energy, emotional strength and, unfortunately, savings. It’s not uncommon for hospital bills and surgeries to cost in the thousands of dollars, especially if the procedures aren’t covered by health insurance. Americans pay more and more for health care every year. In 2009, out-of-pocket payments topped $284 billion – yes, that’s billion, with a B. Under pressure for urgent and unaffordable care, many patients are turning to medical credit cards.

Originally used for elective surgeries like liposuction, medical credit cards are increasingly used by those with limited or no health insurance to pay doctors, dentists, chiropractors and even veterinarians. Among the medical credit cards are GE Money’s CareCredit and Citi’s Citi Health Card.

How does it work exactly?

A medical credit card, or healthcare credit card, works something like a normal credit card: you take out a loan (the cost of the procedure) and pay it back over time. Patients work with their health care providers to establish a payment schedule, usually 6-24 months, and minimum payments. Like with any loan, consumers need a decent credit score to qualify, and worse credit means higher interest rates.

Unlike a credit card, a medical credit card can only be used to cover health-care-related expenses including deductibles. Generally, as long as the patient sticks to the agreed-upon payment plan, he is charged no interest. If he and the health care provider agree, before the card is issued, that he needs more than two years to pay off his debt, he is charged an interest rate between 12 and 26%.

When applying, read the card’s fine print. Your practitioner may not accept a health care credit card, it may not cover a given procedure, and there is often a minimum finance charge on the no-interest plans.

What are the benefits?

These cards carry pretty significant benefits for health practitioners. For one thing, they get paid for the procedure up front. Even if multiple visits or surgeries are required, the practitioner receives his entire payment before a single scalpel is lifted, cutting down on the provider’s administrative costs. They don’t have to worry about sending a debt collection agency after patients, a scenario in which both parties lose. Finally, some practitioners receive kickbacks for putting patients on the card (more on this later).

Medical credit cards offer perks to consumers as well. As long as the patient meets the minimum payments and pays off his debt in two years, he will not accrue any interest. For an extended two- to five-year payment plan, the patient faces a higher interest rate (such as 14.99% for CareCredit). The card helps the patient to budget, and removes the disincentive to get timely treatment. Citi Health and CareCredit don’t have prepayment penalties. As with a 0% intro APR card, the health care credit card makes sense for consumers who know that they can pay off their balance on time.

But patient, beware

Medical credit cards have come under fire for deceptive lending practices. In August of 2010, then-New York Attorney General Andrew Cuomo launched an investigation into the cards after numerous consumer complaints. The office received numerous complaints that patients were pressured into using medical credit cards and were unknowingly charged up-front for procedures or services they never used. Some allege that patients who were eligible for Medicaid or other programs were instead pushed to take out a medical credit card. Others complain that the lenders expected payment for bills that were never sent.

The pitfalls of medical credit cards abound. It’s practically a credit card. That bears repeating: it’s practically a credit card. And like a credit card, the devil’s in the details.

Late Penalties: If you miss even one payment or fail to make the minimum, your interest rate could skyrocket to almost 30%, and your credit score will take a hit. More distressingly, the lenders apply retroactive interest rates: if you’re late, you’ll pay interest on the full amount of the loan. Missing the last payment could sink you into debt for a long time afterwards. Don’t expect to get any slack from your credit company if you’re late on a payment. If you do take out a medical credit card, be sure, absolutely sure, that you can pay it off on time.

No Refunds: If you pay for a service, that’s it. Even if you do not need or receive all the procedures you paid for, receiving a refund is a time-consuming, mind-numbing, next-to-impossible process. This provision comes into play if your treatment requires multiple procedures.

This is certainly not to say that medical credit cards are never a good idea. Like a 0% balance transfer card, it could have significant payoffs if you budget carefully and know your limits. According to CareCredit spokesman Stephen White, more than 80% of the company’s medical cardholders pay off their accounts on time. If you have a good credit score and are confident that you can pay off your debt in two years, a health care credit card may be a solid bet. That said, turn to these cards only if you’ve considered other options first.

Tips for those considering a health care credit card

Have your insurance company cover as much as possible, if you have health care. Choose a provider in your network, and remember that it pays to be pushy with insurance companies. Other sources of help may be available, such as Medicaid, Medicare, or nonprofit programs.

Talk to your health care provider. You may be able to work out a payment schedule with your doctor or hospital, and possibly at a lower interest rate or over a longer time frame. Be sure to ask, though, whether your doctor receives a commission from credit card companies. He may have an incentive to promote the card. Nonprofit organizations such as the National Foundation for Credit Counseling can also offer free, personalized and trustworthy advice.

If you need multiple procedures or treatments, take out a separate line of credit for each so you don’t get stuck paying for treatment you never receive. Once your money is put on the card, consider it gone.

Finally, and most importantly, know your finances. Is there a chance that your financial situation can change and leave you unable to repay the bills? Will your treatment affect your employment, and therefore your health insurance and earnings? Are you the kind of person who would benefit from the structure a medical credit card provides? Have you exhausted all your other options?

Updated April 18th, 2011: NY Attorney General Schneiderman continues investigation into medical credit cards

Newly elected New York Attorney General Eric Schneiderman, who replaced now-Governor Andrew Cuomo last year, is continuing the investigation into GE’s CareCredit and offers tools and tips for consumers on his website. Allegedly, CareCredit charges healthcare providers a fee for the right to offer the cards to their patients, a fee that is partially reimbursed if patients pay by medical credit card. According to an August 2010 press release, “the kickback arragement, plus CareCredit’s payment in full to providers within two days of the charge, creates an incentive for providers to push consumer to use CareCredit…in fact, providers pushed CareCredit over cash.”

Attorney General Schneiderman offers a list of common-sense medical credit card tips as well as a health care credit card calculator that shows the duration and total payment of medical credit card debt. He also reissued a warning to consumers about overly aggressive marketing practices.

Citi Health Card and GE’s CareCredit

Citibank’s Citi Health Card doesn’t offer much information on its interest rates or payment plans. The bank’s website encourages potential applicants to speak to their health care providers about the terms of the card. However, we’ve seen a number of negative reviews of the card. Cardholders complain that they were never billed for their debt but held accountable for not paying them, or not explaining fully the terms of the loan. We would be wary of this card.

Nominally, CareCredit is a better card for those who have less-than-stellar credit, as long as you can repay your debts on time. They offer no interest on plans of two years or less, but offer extended payment plans of up to five years. Their APR is 14.9%*, offering a better deal for customers with bad credit than some credit-score-dependent rates. The penalty and interest accrual rates are about the same. However, GE’s CareCredit is the subject of an ongoing investigation by the New York Attorney General’s office. We encourage those considering a medical credit card to maintain a healthy level of cynicism.

*Interest rates are accurate at the time of writing, but may change at any time