Medical Credit Cards: Treatment Today, Payment Headaches Tomorrow

If you're looking for a loan to help pay for an elective surgery or emergency root canal, you won't have trouble finding one.

Applications for medical credit cards, which are designed to pay exclusively for out-of-pocket health care costs, are ubiquitous at specialty health care and veterinarian offices.

But be careful, say consumer advocates. Many health-care credit cards remain fraught with risks, thanks, in part, to high interest rates that can make the costs of a procedure balloon. (To compare the terms on medical credit cards and loans, see CreditCards.com's "Health-care financing comparison chart.")

"A lot of times medical services are delivered in an emotionally charged environment," says Mark Rukavina, founder of the health-care consulting group, Community Health Advisors.

That can make for a risky backdrop when you're making important financial decisions, he says -- especially if you're trying to weigh quickly whether you can afford to repay a loan by the time an interest-free promotion expires.

"Medical credit cards are probably most beneficial to people who have the financial resources to manage and pay off those bills in a very planned way," says Rukavina.

If you're already financially squeezed, however, a high-interest card that promises an interest-free promotional period upfront could just delay the pain, he says, and potentially create deeper problems down the road. (For advice on what to do if you're considering a medical credit card, see "5 tips when comparing health-care credit cards.")

A controversial way to pay

Medical credit cards, such as those offered by CareCredit, Citibank and Wells Fargo, have been courting controversy for years, sparking investigations by state attorneys general and attracting sharp criticism from consumer advocates who say the cards trap too many consumers into high-interest debt.

Medical providers say the cards, which often promise long-term, deferred-interest financing, help ensure patients get the treatment they need, when they need it.

"The system has helped us deliver ideal treatments to patients who are maybe in a less-than-ideal financial situation," says David Rice, whose dental practice in Upstate New York offers the CareCredit card. "We don't need to compromise their care because we can spread out their financial obligations over time."

Patients can typically apply for the cards without leaving their doctor's office and, in most cases, get an approval decision instanteously.

Approval rates are high, according to marketing materials intended for health-care professionals. So even consumers with less-than-perfect credit may be able to qualify for an instant loan when they need one. Some health-care lenders, such as American Healthcare Lending, may even supplement traditional credit scores with alternative data, such as checking account history, when evaluating a patient's creditworthiness.

However, many consumer advocates remain skeptical, particularly since the interest rates on most health-care credit cards after a promotional deal expires are well over 20%.

"I would argue that there's great potential for abuse with medical credit cards because of the way they're marketed by medical professionals and because of the terms that are offered," says Gina Calabrese, a law professor at St. John's University in New York City.

Calabrese points to the usury rate in New York State -- 25% -- as a benchmark to measure the medical cards' costs against.

"In New York State, it would be a crime to lend someone money at a rate of 25% or higher," says Calabrese. Yet the standard rates on two of the most widely available medical credit cards in the United States range between 26.99% for the CareCredit card and 29.98% for the Citi Health card. The rates are legal: State usury laws such as New York's were long ago trumped and rendered irrelevant by a moot by a 1978 Supreme Court decision that nationalized credit card rates.

All three of the medical credit cards available nationwide -- the CareCredit card, the Citi Health card and the Wells Fargo Health Advantage card -- also offer interest-free promotional deals that last from six to 24 months. "As long as you pay off that procedure within that time, you won't incur any finance charges," says Calabrese.

"The problem is, people don't do that."

Depending on how much the original procedure cost, the consequences of that decision can be steep.

Many health-care credit cards, including the CareCredit card, are deferred-interest credit cards. A cardholder who fails to pay the full amount due by the time a promotional period expires will be charged interest on the full amount charged to the card, including the amount that's already paid off.

Some critics refer to this practice as a retroactive rate increase, which is banned under the Credit CARD Act of 2009. However, that portrayal is inaccurate, explains Cristy Williams, a spokeswoman for CareCredit.

"There is no rate increase or change in the interest rate," says Williams. "During the promotional period, the 26.99% APR is applied to the balance subject to finance charges, but is deferred," wrote Williams in an email. "The CARD Act did not ban deferred interest promotional financing programs such as those offered by CareCredit."

Trust undercuts consumer protections

Health-care providers have also come under fire in recent years for offering the cards in place of more traditional payment plans. Consumer advocates say that health-care providers' role in connecting consumers to third-party creditors is worrisome, particularly since many of the health-care providers who participate in medical credit card programs only partner with one brand and aren't subject to the same disclosure standards as lenders.

For example, health-care providers aren't covered by the Truth in Lending Act, which requires creditors to clearly disclose the terms of a loan so that you can quickly understand how much you'll be charged and compare those terms with other loans.

"The Truth in Lending Act applies to lenders. It doesn't apply to people brokering loans," says Jim Hawkins, a professor of law at the University of Houston.

Health-care providers also don't have to disclose why they are partnering with a particular medical credit card provider or how that relationship benefits their practice, says Hawkins. "The doctor doesn't have to say 'I chose this credit product because it's cheapest for me, not because it has the best terms for you.'"

Consumer advocates say that's troubling since some patients may not realize that their health-care provider has other motivations and may be persuaded to offer a particular card, even if there are better lending options available.

"The Truth in Lending Act's principal goal is to facilitate comparison shopping," says Jeff Sovern, a professor of law at St. John's University. "It requires lenders to give consumers information so the consumers can get the best deals for themselves."

However, if a health-care provider recommends just one lender and the consumer signs an application without looking at other options, that undercuts the process, says Sovern.

People may mistakenly assume that the credit card that the doctor's office is recommending is the best on the market, and they may not bother to comparison shop, he says.

"People inherently trust their doctors," says the University of Houston's Hawkins. "In this area, that trust might lead people to make decisions that they wouldn't otherwise make if they had better information."

Hawkins compares the process of applying for a loan at a doctor's office to buying a car. "When you go to the car dealership, you know you're about to get ripped off," says Hawkins. You have your guard up, so you're more likely to watch out for red flags. However, "when you go to the doctor's, you're not thinking 'I need to question whether or not their advice is right.'"

In addition, Hawkins says, some consumers may not even realize that they're taking out a loan from a third party and may assume that it's their doctor's office that's offering the loan.

Hawkins cites his own experience a few years ago. While studying fertility financing for a paper that was eventually published in the Tulane Law Review, Hawkins visited the websites of numerous fertility clinics across the US and became confused by the language on some providers' sites. "For some, I mistakenly thought the doctor was offering the credit until I talked to someone in the clinic," says Hawkins. The third-party relationship wasn't made clear, he says.

A loyal following for some health-care credit cards

David Rice, a dentist in New York whose practice offers the CareCredit card, says that there may indeed be some health-care providers who take advantage of the program and unduly pressure people into taking out loans they can't afford.

Focusing on a few bad apples is misguided, he says. "There was a period when CareCredit was specifically attacked in the news because people felt like doctors were taking advantage of patients," says Rice. "My retort to that is, in every profession out there, there are excellent people, there are good people and there are bad people and those bad people will always find a way to abuse what's brought to the table."

"It's rarely a piece of technology or a system that's bad," he adds. "It's almost always the people who are good or bad."

Rice says that his staff takes pains to make sure patients understand the terms of the card and realize that that the card is being offered by a third-party financier.

"They spend a lot of time with that patient to let them know that they need to have that [loan] paid in full before the date is due or the interest rate will be very, very substantial for them," he says. "We want people to be very well aware of what the terms are."

Rice says that some health-care providers who haven't properly disclosed the terms to consumers may simply have run out of time. "My feeling is that time is everybody's worst enemy," says Rice. "In many health-care environments, the medical office or the dental office doesn't spend enough time to have their patient fully understand what they're agreeing to." And that's too bad, he says. "It's a wonderful opportunity for people so long as they understand what they're saying yes to."

Many consumers agree. CareCredit, in particular, has attracted a devoted following among some cardholders thanks to its interest-free promotions that can last as long as two years.

"I've been an advocate ever since I had it," says Jennifer Diliz of Miami Lakes, Fla., who used her CareCredit card to finance surgery for both her and her dog. "It helps keep you on budget and [you don't have to] pay more than it would have originally cost you," she says, referring to the interest-free promotion.

"I haven't had a lick of problems with them," adds Ingrid Kast-Fuller of Pasadena, Texas, who used her CareCredit card for dental work.

"We could have put it on a Discover, or another credit card, but at the time, we didn't have any that were promos," says Kast-Fuller. "That was the big issue ... we had the chance to put it on zero interest as opposed to putting it on a regular credit card and having to pay [interest]."