Interest rate hikes will ding patients who put medical debt on credit cards

Tiffany Yarina didn’t max out her credit card from a home renovation or luxury purchase. It was from cancer.

In 2005, Yarina started losing a lot of weight and watched her tonsils swell. Her doctors eventually diagnosed her with non-Hodgkin’s lymphoma. She needed chemotherapy and a tonsillectomy — but she had no health insurance.

Yarina was in the National Guard but did not yet qualify for Tricare, the military’s health insurance. Individual insurance also wasn’t a feasible option back then. So she did what she thought she had to do with the mounting piles of medical bills: “I put literally everything on my Citibank card,” Yarina said.

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The bank said her $10,000 credit card balance would not accrue interest while she was going through treatment. But all bets were off after, as her minimum payment settled in at more than $200 per month. She fell behind, even with her father helping to pay her other expenses. Her cancer deteriorated her health and left her credit in what she called a “black hole” for years.

Millions of sick and injured people like Yarina, who are uninsured or have large deductibles, have put or will soon put their medical bills on a credit card. An investigation from Kaiser Health News and NPR estimates 1 in 6 adults are paying off medical or dental credit card debt. A survey from credit card giant Discover suggests that total could be even higher: Roughly 41% of people with medical debt say they have used a credit card for that debt — scenarios that stem from persistently high rates of the uninsured as well as ballooning out-of-pocket expenses imposed on the insured.

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But there’s a new wrinkle for patients who use plastic: Under new federal monetary policy, they will likely be saddled with higher interest rates and tighter credit limits. That will jeopardize their creditworthiness, increase their costs, and potentially lead to more debt collection lawsuits and wage garnishments for people who can’t keep up, said Erika Rickard, an attorney who studies the civil legal system for the Pew Charitable Trusts.

The Federal Reserve aimed to temper nationwide inflation in June by raising its benchmark interest rate by 0.75 percentage points, the largest such hike since 1994. The Fed is expected to repeat that increase this week. That means it will become more expensive to borrow money for mortgages, loans, and credit cards.

Jay Zagorsky, an economics professor at Boston University’s Questrom School of Business, said there isn’t a perfect correlation between a higher Fed rate and higher interest rates for credit cards. While the Fed rate is a vital metric, card companies factor in other lending rates and credit scores. However, Zagorsky said he fully expects in the short term that “credit card interest rates will start climbing again. I expect this more because I think banks are very worried about risk right now.”

Gloomier economic conditions also could prompt credit card companies to slash people’s credit limits, often without giving notice. In rare but extreme situations, companies that give proper notice can charge penalties if people go over those newly lowered limits. For example, if a patient puts $8,000 worth of medical bills on a credit card that has a $10,000 limit and the credit card company decides to cut that cap to $7,500, the patient has to come up with $500 — or else get socked with extra fees.

“That’s actually what I worry about,” Zagorsky said. Subprime and deep subprime borrowers are especially vulnerable to medical bills devouring their available credit. Their lines of credit average $4,500 and $3,100, respectively, according to 2020 data from the Consumer Financial Protection Bureau. A simple outpatient procedure for someone with a high deductible could easily consume that amount.

The average annual interest rate for credit cards ranges between 17% and 21%, and those rates have slowly increased since the Fed’s June hike. Interest rates are based on credit reports. People with better credit are more likely to pay off their balances quickly and get lower rates as a result.

Some hospital systems have started offering credit cards to patients. Those cards are advertised as budget-friendly ways to pay off deductibles, copays, and coinsurance, but the fine print shows they can have much higher interest rates than the already-rising averages.

AdventHealth, a tax-exempt system that owns 50 hospitals in nine states and has $15 billion in annual revenue, recently partnered with CareCredit on patient credit cards. The system doesn’t charge interest if patients clear their balances within six to 24 months, depending on their plan. But if patients fall behind, interest will be charged “from the original purchase date,” according to CareCredit’s terms. The annual interest rate for new accounts is 27%, as of July.

AdventHealth and CareCredit did not respond to interview requests.

If the Fed’s policies continue to push interest rates higher, people who want to avoid using their credit card or can’t obtain one could dabble more in alternative ways to finance their care — like “buy now, pay later,” which has become a growing but controversial option. These point-of-service loans essentially allow people to make a down payment on a service, like a medical bill for a procedure, and then pay off the rest in a few installments. Sometimes, there is no interest or late fees.

“We want to give the patients every option of payment possible,” said Brian Doyle, a vice president at Rectangle Health, a company that works with dentist and physician offices to help put patients on “care now, pay later” financing plans. Doyle explained patients are not penalized if they miss a payment, but acknowledged interest accrues if they don’t pay their balance by the end of their term.

The “buy now, pay later” movement comes with a mountain of caveats. Notably, “buy now, pay later” does not have the same consumer protections as credit cards; people don’t build up their credit scores by paying on time; and many companies still charge interest or late fees. Interest rates for people who don’t pay off their installments with Rectangle Health are based on a soft credit pull and could be as high as 30%, Doyle said.

During Yarina’s cancer treatment, she eventually qualified for Medicaid in Pennsylvania, where she lived at the time, although that took months of begging and arguing. Medicaid retroactively covered a lot of her medical expenses, including her chemotherapy. Debt collectors, meanwhile, hounded her and her family for her unpaid credit balance.

Yarina still has medical debt today, stemming from tooth, jaw, and throat problems that fell within her insurance deductible. But her credit has slowly improved. She recently bought a new car, a Hyundai Kona — the first time she was able to do so without needing a co-signer.

“For too long, I was looked at like I had three heads when trying to finance something or secure a loan,” Yarina said. In that regard, she said, the “financial toxicity of having an illness” was worse than being treated for the illness itself.