June 15, 2023
The high cost of medical care is one of the most important reasons why I want everyone to work on building an emergency savings fund that can cover up to a year of living expenses. Deductibles and copays can quickly add up to more than $1,000 for even routine tests and care. And a more serious condition can be a rough financial burden.
On top of that, your doctor’s office may be making the cost of care even worse. A new report from the Consumer Financial Protection Bureau (CFPB) shines a light on the growing popularity of medical credit cards that are offered at doctor and dental offices as a way to pay for care if you don’t have the cash or savings ready.
If you’re not very careful, medical credit cards can be a very costly mistake. The way these cards work is a bit different from how your regular credit card works. With a medical credit card, there is typically no interest charged for an initial period, which is usually between six and 18 months. That’s a great deal….but only if you manage to pay off your entire medical bill before this period of “deferred” interest expires.
If you still have an unpaid balance after the deferred interest period expires, you end up getting charged an insane interest rate. According to the CFPB the average interest rate for a medical credit card is 26.99%. That’s a lot more than the 20% average interest charge for regular credit cards.
I want to be clear, 20% is already alarming. I don’t have words for how it can be that people are charged, on average, 27% if they can’t manage to pay off medical bills. We’re not talking vacations. Or fancy dinners out, or concert tickets. It makes me so angry that some financial institutions have no shame in charging such high rates for medical care.
The CFPB estimates that about 20% of people who used a medical credit card between 2015 and 2020 ended up being charged interest. An estimated $1 billion in deferred interest charges were paid on these cards between 2018-2020 according to the CFPB.
Here’s my advice on how to deal with your out-of-pocket medical care costs.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.