Medical debt consolidation: Is it a good idea for you?

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In a Nutshell

Medical debt consolidation may help lower your monthly payments and reduce the number of bills you pay each month. But you could wind up spending more in the long run and lose out on important credit protections that apply to medical bills.

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Paying off large amounts of medical debt can seem impossible. But with many medical bills, there’s no interest charged — so sticking with an original payment plan is often a better option than medical debt consolidation.

That said, the reality is that medical debt can be so draining that you can’t cover day-to-day expenses. And keeping track of numerous bills from different providers each month can be overwhelming. Medical debt consolidation could help address both of those issues if it allows you to combine all of your bills into a single, less expensive monthly payment.

But there are two reasons to avoid medical debt consolidation if you can.

One is that it typically adds interest or other costs to your monthly payments, making your debt even more expensive in the long run.

The other is your credit: When you consolidate medical debt by paying it off with a personal loan or a credit card, for example — you lose certain credit protections that apply only to medical debt.

You might still think medical debt consolidation is the only way to get immediate relief. Let’s look at how medical debt consolidation works, some options if you go that route — and other kinds of help to explore before deciding.



How medical debt consolidation works

As with other types of debt consolidation, medical bill consolidation involves taking out a new loan or line of credit to pay off your current debt. Those funds pay off the existing debt, and you then start paying off the new account.

When it comes to most kinds of debt, the goal of debt consolidation is to simplify your payments or pay less interest than on your current accounts.

But many types of medical debt don’t accrue interest at all, or they carry especially low interest rates. In these situations, consolidating the debt with an interest-accruing loan may wind up costing you more money overall — especially if you have to pay any fees to set up the new loan.

Consolidation may save you money, though, if your current bills are accruing considerable interest. You may find yourself in this position if you paid for medical procedures with a credit card, a loan, or a medical credit card with a deferred interest offer that you weren’t able to pay off before the special financing period ended.

Because medical debt consolidation can simplify your payments, you may be thinking about pursuing it even if it means paying more for your medical bills over time because of added interest. But it’s important to know there’s another trade-off to consider — and it involves your credit.

Can medical debt consolidation affect your credit?

If you’re on a payment plan from your healthcare provider for your medical bill, that debt generally won’t be reported to the three major consumer credit bureaus — Equifax, Experian and TransUnion. In that case, the debt wouldn’t affect your credit.

That doesn’t mean medical debt can never show up on your credit reports.

If you don’t pay your medical bills, then the account can be sent or sold to a collection agency eventually. The collection agency could report your unpaid debt to the bureaus, which can show up on your credit reports and stay there for up to seven years from when your account first went past due.

But with medical debt, you might catch some breaks before getting to that point.

The reality of expensive hospital stays, along with the delays that can come from dealing with health insurance providers, have prompted special treatment for medical bills, including …

  • The major consumer credit bureaus have agreed not to include medical collection accounts on your credit reports until the account is at least 180 days past due.
  • The credit bureaus will also remove medical collection accounts from your credit reports if your insurance company pays (or is in the process of paying) the bill.
  • For veterans, certain medical debts can’t be reported to the bureaus until one year has passed since the procedure. Additionally, medical debt that was delinquent, charged off or sent to collection must be removed from your credit reports if it’s fully paid or settled.
  • When they’re part of your credit history, medical collection accounts may have a lesser impact on certain credit scores than other types of collections accounts. But this isn’t an across-the-board rule.
  • Some credit-scoring models will also ignore paid medical collections entirely when determining your score.

Medical debt consolidation may stop these credit protections

Most of the rules and laws listed above apply specifically to medical debt. So any medical procedures you initially paid for with a personal loan or credit card probably won’t receive the same protections. Instead, that debt will be classified as a loan or credit card debt.

The same concept applies to medical debt consolidation. If you consolidate your medical bills with a personal loan or transfer the debt to a credit card, your account may no longer be classified as a medical bill account because the debt will now exist in a loan or credit card account.

Those accounts are likely to report your activity to credit bureaus. As a result, making on-time payments could help you build credit. But you would also lose many of the consumer protections outlined above. And a late payment, default or collection account could show up on your credit reports and hurt your credit.

Medical debt consolidation options

Despite the risks, you might decide that medical debt consolidation still makes sense for you. In that case, you may have several options.

Keep in mind that the best choice for you could depend on your goals and budget, and that your credit health can also affect the loan amount and interest rates you receive.

0% intro APR balance transfer credit cards

Balance transfer credit cards with 0% introductory APR offers are typically used to consolidate credit card debt, and they’re a potential choice for consolidating medical debt if you originally paid your medical bills with a credit card.

Sometimes these offers include balance transfer checks, which allow you to pay off existing debt and then assume that amount as a balance on the new credit card. You may also be able to transfer money into your bank account, which you can then use to pay off your medical bills.

An introductory 0% APR can save you money on interest for as long as the intro period lasts — but balance transfers come with lots of risks. Watch out for balance transfer fees, which are often 3% to 5% of each transferred amount.

You’ll also want to develop a plan for paying off the balance in full before the promotional period ends, because the ongoing interest rate you’ll pay after the intro period ends could cost you a lot in the long run.

Personal loans

Depending on your credit, personal loans may have low interest rates and long repayment terms, which can translate into monthly payments that are more manageable than your original debt.

But keep in mind that interest starts to accrue once you receive the loan, and some lenders charge an origination fee on the loan amount.

Secured loans or lines of credit

You may also be able to use a secured debt, such as a home equity loan or home equity line of credit, to finance the payment of your medical bills.

While secured loans may offer lower rates and higher loan amounts than unsecured loans, the risks are too high to recommend it in all but the most serious cases.

Missing medical bill payments might hurt your credit and lead to collection efforts — but missing secured loan payments could lead to the loss of your home or other important possessions.

Alternatives to medical debt consolidation

For most people who didn’t originally pay with a credit card or loan, consolidating medical bills won’t be a great option. Medical bills often have low or no interest, and providers may work with you to find manageable payment plans. Also, special rules apply to unpaid medical bills that can limit their impact on your credit.

But if you’re feeling overwhelmed by the number of medical bills you have or can’t afford to pay them all, you may be able to get some relief without turning to debt consolidation.

  • Negotiation — Reach out to your creditors and ask if they can work with you to offer a different repayment plan or lower your outstanding balance. You can also reach out to medical bill advocates, such as California Medical Billing Advocates (for Californians) or the Patient Advocate Foundation (nationally) — both nonprofits that offer free services. Just keep in mind that while some offer free or low-cost services, it’s not uncommon to find others that typically charge $100 an hour — or take a portion of what they save you — to negotiate on your behalf.  
  • Credit counseling — Nonprofit credit counseling agencies offer debt management plans, which function like debt consolidation. You’ll make one monthly payment to the agency, which will then pay your creditors directly. If you have credit card debt, the agency may be able to include those accounts and negotiate fee waivers and lower interest rates.
  • Bankruptcy — If you’ve exhausted all other options and you’re still struggling to pay your medical bills, a medical bankruptcy could be a last resort. But it isn’t a decision to take lightly. Filing for bankruptcy won’t help cover future expenses if you’re dealing with an ongoing medical condition, and it can have especially severe, long-lasting consequences for your personal finances and overall credit. A bankrupty can affect your ability to get a car, buy a home or even rent an apartment for up to 10 years depending on which chapter you file. If you think bankruptcy might an option for you, we advise doing extensive research first.

About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his w… Read more.