What You Need to Know Before You Sign on the Dotted Line

Unmanageable health care costs are the number one cause of bankruptcy in the US today. As these costs soar and insurance coverage is ratcheted back by employers, 62% of Americans say they are worried about the financial hardship big medical bills could bring, according to a new survey conducted for CreditCards.com by GfK Roper Public Affairs and Media. More than one-third said they’d have to borrow if faced with a medical bill over $1,000 — so it’s no surprise to hear that big lenders, including Citicorp, Capital One and the CareCredit unit of General Electric, have turned this into an opportunity — creating medical care credit programs to fill the gap and rake in more profits.

Recently I spoke with Charles Inlander, founding president of the People’s Medical Society and author of Take This Book to the Hospital With You, on the tricky subject of health savings accounts (HSAs), which are another much-talked-about attempt to help consumers offset rising health care costs. Those, he told me, are more hype than help. Now I wanted to hear what he had to say about these health care loans and credit cards, especially in light of the mortgage meltdown. Good idea or not?

JUST ANOTHER GIMMICK

The short answer from Inlander is that like health savings accounts, these health loans offered by mainstream financial service companies are just another gimmick to shore up their profits. He compares them with subprime mortgages, in which low-income, first-time home buyers were seduced with low interest rates that ballooned to 20% or more when they couldn’t keep up with payments. These folks ended up deeper in debt, at a higher cost — and hardly a day goes by that we don’t hear yet more bad news about the mess that has resulted.

In the case of health care loans, consumers seek financing for medical and dental procedures, including elective ones. Bank Web sites promise an on-line “yes or no” within minutes, which may seem a relief if you’re desperate to figure out how to pay for necessary medical care — but, as Inlander points out, these loans aren’t given from the goodness of the lender’s heart. “A loan is a loan is a loan,” he says. “It’s purely a business deal. You’ll need to show assets, debts, income and the lender wants to see what collateral you have.” There are many, many different options and packages — variable interest rates, fixed rates, interest-free loans, different loan periods, unsecured loans and so forth. The deal you get is directly related to the quality of your credit rating. As with all loans, there is government oversight and regulation.

No question, there are times when even a high-priced loan may solve a problem — especially if it is related to your health or that of a family member. It’s important to note, however, that if you don’t make the required payments on time, whatever the reason, your financial problems get worse… and worse. Unfortunately those who really need help paying their medical bills — the 47 million Americans without health insurance — probably can’t even qualify for a health care loan since the likelihood is high their financial profile isn’t good enough, notes Inlander. Lenders’ requirements have grown tighter and tighter in recent months.

LOANS AND CREDIT CARDS: A PRIMER

Following is a review of currently available medical service loans and credit cards…

Zero-interest loans. For those with favorable credit ratings, these loans are available with zero-interest financing. Qualified applicants can take out interest-free loans for terms up to 12 months for basic care or expensive, elective medical procedures — such as crowns for their teeth, orthodontics or even a tummy tuck (though your lender may limit what procedures can be paid for with your loan). People who’d prefer to pay for such procedures over time, and have room in their budget to comfortably make monthly payments, may find these an attractive option.

Caution: Failure to meticulously meet the terms of an interest-free loan can backfire. Not only will this damage your credit rating, penalties for late payment may include substantial late fees and a high interest rate for the balance of the loan. The lender is in it for a profit — ask how that’s built in, so you know what you are getting into before making a commitment.

Fixed-rate loans. If you can’t qualify for an interest-free loan or don’t think you can pay the full cost within the required time, fixed-rate loans are available for longer periods of time and at varying rates. One bank’s Web site currently advertises fixed rates from 1.99% to 25.99% for periods up to 24 months.

Caution: Always read the fine print in all loan and credit card agreements. Inlander warns that one late payment can send a low rate skyrocketing to 23.99%. Not only will this end up costing way more than you’d anticipated, it will also hurt your credit rating.

Health care credit cards. Available from numerous financial service companies, these cards can only be used for medical expenses. Though different companies have different requirements, it’s important to carefully investigate and take these variables into account before choosing one. Compared with a fixed loan, a health care credit card is more flexible, providing a line of credit for medical costs to be used as needed. It’s therefore better for people who have ongoing medical expenses. As with loans, the terms of your agreement are based on your credit rating. People with poor credit will either be denied such a credit card, or will be given one that charges an exorbitant interest rate.

Caution: Watch out for high interest rates and tight deadlines before penalites are added. These often will lead a person already in high debt into more debt.

EXERCISE EXTREME CAUTION

Inlander is no fan of health loans and credit — but he is sympathetic to those who use them to pay for basic disease care, noting that they’re generally desperate to find a way to pay medical bills or even buy medical insurance. Unless you are absolutely certain that you can pay it off, it makes no sense to go into debt for an elective procedure. Save up for it instead.

However, if you find that you have to borrow money to pay for basic medical needs, make sure you first exhaust all other alternatives. Ask whether your medical provider offers a sliding fee scale according to income or whether other financial assistance is available. Perhaps you can arrange a payment schedule directly with the doctor’s office or hospital. If you do end up needing to borrow, shop around and carefully compare rates and terms. Also, Inlander points out that if it is a matter of life and death and you cannot pay, a hospital emergency room is still required to treat you.