Medical Loans and Medical Credit Cards: What to Know Before You Sign Up

The Biden administration recently proposed removing nearly all medical debt from consumer credit rating calculations.

This move could be particularly important for people who struggle to make credit-based purchases while managing medical debts. However, it may be less meaningful for the growing numbers of people who defray their healthcare payments with specialized medical credit cards or medical loans. Between 2018 and 2020, consumers used such methods to pay for nearly $23 billion in healthcare expenses, according to the Consumer Financial Protection Bureau.

Medical loans and medical credit cards are financing options specifically designed for healthcare bills. As with any loan or credit card, they can help a person break a large expense into more manageable payments. But as with any debt, there are some things to know if you’re considering them to pay for your medical needs.

Medical Credit Cards vs. Medical Loans: What Are the Differences?

Medical credit cards and medical loans have increased in popularity as servicers have expanded their menu of covered expenses. They can now be applied to everything from copays to elective surgery, cosmetic procedures, and emergency visits. These financing options have taken their place alongside the more familiar ways to pay your medical bills: insurance, flexible spending accounts or health savings accounts, installment plans, and plain old cash.

Medical Credit Cards: What to Know

Who offers medical credit cards? Numerous financial companies now market medical credit cards, including Synchrony Financial, Wells Fargo, and Comenity Capital Bank.

What is covered? With its use restrictions and payment structure, a medical credit card works similarly to a store credit card. It is typically limited to use only at healthcare providers, for medical services.

How much coverage is available? Balance limits vary by card issuer, and they are based on the applicant’s credit rating.

What interest rates are offered? The typical medical credit card’s APR is 26.99%, versus 20% for the average general credit card, according to the CFPB.

What to consider: Use caution and avoid using a high-rate card to pay for medical care, says Christine Benz, Morningstar’s director of personal finance and retirement planning. “These types of financing may look like a convenient way to cover medical bills, but with interest rates that are generally worse than credit cards’, it’s hard to see a case for them,” she says. “The only reasonable use case would be if special terms are on offer and you know that you can use them to your advantage, paying off the debt before the high interest kicks in.”

Medical Loans: What to Know

Who offers medical loans? Many financial institutions, banks, and credit unions offer such loans.

What is covered? Medical loans can cover electives, planned care, or emergencies, depending on the loan’s terms. In some cases, you may be able to use them to pay high deductibles and out-of-network healthcare charges.

Medical loans are frequently taken out ahead of a procedure and designated for a specific medical treatment. According to the CFPB, unlike medical credit cards, loans “are generally offered before a treatment and only authorized to cover that treatment (for example, to cover the cost of a root canal procedure).”

How much coverage is available? Medical loan amounts can range from $1,000 to $200,000.

What interest rates are offered? Interest rates for medical loans can range widely, from 6.99% to 35.99%. Medical loans are frequently designed as installment or term loans, with payment schedules that may run anywhere from six to 24 months or even longer.

What to consider: As with any loan, it’s important to have a full understanding of the lender’s terms and conditions before signing up, says Sheryl Rowling, Morningstar’s editorial director for financial advice. “Getting a loan like that is like getting any other type of high-cost consumer debt: Overcoming the interest is going to be the biggest hurdle,” Rowling says. “And if there are other ways around it, those ways should be explored.”

Deferred Interest: You Might Feel a Pinch

Medical credit cards and loans are sometimes promoted with a deferred interest rate—for example, 0% interest for a certain term, such as six or 12 months. This seemingly interest-free financing can be appealing, particularly in the midst of a medical situation.

What might be less clear is that “deferred” means the interest is held back—but it continues to build. Often, the special interest rate only applies if the bill is fully paid before the end of the payment term. If a payment is missed or the debt isn’t completely cleared by the date in the agreement, that built-up interest is then added to the amount owed. A missed deadline can be expensive.

Benz says: “The only way to use them well is to do so from a position of financial strength. For example, if there are special terms on offer, such as 0% free financing for the first year, make sure that you’ll have the funds to pay back the loan or credit card when that free financing period expires.”

Debt From Medical Expenses—but Not ‘Medical Debt’

Medical loans and credit cards are frequently marketed to patients through medical providers but serviced through financial companies. This distinction affects how the debt is categorized, a difference that users will want to keep in mind.

Because medical credit cards and medical loans are serviced by a lender—not a medical provider—they are not classified as “medical debt.” Thus, changes made to debt collection practices in 2022, which removed some medical debt from credit rating calculations, do not apply. A default can be sent to collections and (as of now) can affect the borrower’s credit rating.

Alternatives to Medical Loans and Medical Credit Cards

Rowling and Benz recommend that people explore other possibilities before taking on a medical loan or medical credit card.

If insurance is not an option, Rowling says patients could talk to their healthcare providers about creating a payment plan. “Many times, you can have the medical facility itself finance what it is you’re doing and work out a payment arrangement with them,” she says.

Rowling notes that such payment plans often provide easier terms and little or no interest. “Many times you can make payments over time, as opposed to having to pay in a lump sum. It’s also possible to negotiate the amount owed now,” Rowling says. “Frequently, medical facilities will accept a lower amount if you’re able to pay it all at once.”

Benz suggests considering a wait-and-save approach if the situation allows. “In the case of an elective procedure that can wait and is HSA- or FSA-eligible, another idea is to save in those accounts in advance of the planned procedure,” she says.