Your Guide to Health Care Credit Cards

They're suddenly everywhere, but are they a good idea?

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Health care expenses are skyrocketing. The US government predicts that out-of-pocket spending will reach over $3,300 a year per household in 2014, up from $2,500 in 2009. And that’s if you’re lucky enough to have health insurance. In 2008, two in three Americans under 65 had trouble paying their medical bills, were uninsured or uninsured, or went without needed medical care because of cost concerns at some point in 2007. And out-of-pocket expenditures in 2009 were more than $284 billion—yes, billion. Hardly pocket change.

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Medical expenses represent a significant burden on even insured Americans, as the cost of just an ambulance ride tops $1,000. For those struggling to pay, many health care practitioners provide an option: medical credit cards. However, these lines of credit often benefit the practitioner far more than the consumer.

What is a medical credit card?

Medical credit cards, or health care credit cards, were originally used to cover elective surgeries like liposuction and are similar to credit cards. You borrow money for the treatment, and pay back the money over time. Working with the patients, care providers establish a schedule of re-payment, usually over 6 to 24 months. As with a normal credit card, you must be approved, and a lower credit score results in much higher interest rates.

Unlike a standard credit card, however, you can only use a health care card for related expenses such as prescriptions, surgeries and insurance deductibles. Similar to a 0 percent balance transfer card, as long as you make your minimum payments and stay on schedule, you aren’t charged any interest. If you and your provider decide before the card is issued that you’ll need more than 24 months to get rid of the debt, you will likely incur interest at a rate somewhere between 12 percent and 26 percent.

Among the most common medical credit cards are GE Money’s CareCredit and Citi’s Citi Health Card; the cards are accepted by a variety of practitioners, from primary care physicians to optometrists to even veterinarians. Most health care providers will accept health care credit cards, but may only use certain banks. Be sure to read the fine print: your doctor may not accept your card, the card may not cover your needed procedure, and the no-interest plans may also require a minimum charge.

What’s in it for your doctor?

First off, many medical credit cards offer kickbacks to practitioners. This is a pretty clear incentive for your doctor to tout its benefits. Practitioners are also paid for the entire treatment upfront, even if it takes multiple visits or procedures, which saves administrative work and headaches. They will never need to send a debt collection agency after a patient, which benefits both parties. Basically, the practitioners are rewarded with reduced uncertainty, in addition to any commission they receive.

What’s in it for you, the patient?

The biggest benefit is that you, the patient, can avoid interest charges on your medical procedures if you meet the minimum payments on time. It’s a loan that can help you budget, and allows you to receive treatment you need right now but can’t afford. Citi Health and CareCredit don’t have prepayment penalties, an advantage other lines of credit may not have. Like a 0 percent intro APR card, medical credit cards are best suited for patients who know that they can make their scheduled payments, otherwise patients can be charged huge late payment penalties, as well as significantly higher interest rates.

Medical credit cards come under attack

New York Attorney General (and now Governor) Andrew Cuomo opened an investigation in 2010 into GE Money’s CareCredit. Health care practitioners have a strong incentive to encourage their patients to use medical credit cards; Cuomo’s investigation unearthed a number of deceptive practices. “Patients are being misled into paying for services they never received by the people they should be able to trust the most—their doctors. Doctors are supposed to represent patients, not credit card companies, no matter what kind of kickbacks they are offered,” Cuomo said in a statement.

Patients allege a number of abuses, ranging from incomplete information (some who were eligible for Medicaid were pushed to pay via health care card) to administrative headaches (they were expected to pay bills they never received) to even more egregious offenses (some were signed up without their consent or knowledge). Medical credit cards do have their drawbacks, which are not necessarily obvious. A health care credit card is practically a regular credit card with more restrictions, and like with a regular credit card, all the nastiness is banished to the fine print.

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No Refunds: The catch may not be obvious. Surgeries rarely come with a money-back guarantee. But if you pay for, say, a series of five injections but stop treatment after three, you won’t be able to recoup the cost of the last two shots. Trying to get a refund is an excruciatingly slow, inefficient and nearly impossible task. Never pay for more than one treatment with a single line of credit. Ever.

Stiff Late Penalties: If you don’t meet the minimum payment even once, your interest rate could climb to nearly 30 percent and your credit score will drop. The penalty APR’s are the same as, or worse than, your everyday credit card. This is why you must be certain you can stick to your payment schedule.

Retroactive Interest Rates: In his investigation, Cuomo emphasized the practice of applying the penalty APR to the entire balance, not just the remaining balance. For example, let’s say you took out a loan of $50,000, missed your last payment, of $500, and faced a penalty APR of 30 percent. Normally—ideally—you’d only owe that interest on the $500. But with a health care credit card you’d actually owe penalty interest on the entire $50,000. For one late bill, you’d be stuck in debt for quite some time.

Not a last resort, but close to it

Medical credit cards offer some advantages to typical 0 percent interest credit cards, particularly the possibility of a two-year interest-free period. However, that’s about where the benefits end. Do your due diligence before taking out a health care credit card. If you have health care, talk to your insurance representative to make sure they’ll cover as much of your care as possible (and make sure you are clear on what they won’t cover). Choose a provider in your network. Depending on your financial circumstances, Medicare, Medicaid or a nonprofit program may be able to assist you.

Don’t be afraid to ask your health care provider whether he receives a commission from a credit company. And don’t be afraid to ask if you work out a more lenient payment schedule with your doctor or hospital, potentially with lower interest rates, minimum payments or penalties than you would receive from a credit card. If you are ambivalent about your provider’s advice or terms, there are nonprofit organizations like the National Foundation for Credit Counseling that can offer you trustworthy advice for free. If your treatment requires multiple installments, pay for each procedure with a separate line of credit so you are not forced to pay for treatment you never receive.

Lastly, and most importantly, it is imperative that you know your financial situation. Would you benefit from the structure and budgeting help that a medical credit card’s preset payments provide? Is your financial situation likely to change? Will your treatment affect your ability to work and draw a salary? Have you exhausted your other options? Have you actually exhausted your other options?

Tim Chen is founder and CEO of NerdWallet.com, a site dedicated to educating consumers about credit cards.

Corrected 3/11/2011: A previous version of this post incorrectly described the ChaseHealthAdvance card.