How Medical Debt Consolidation Works

If the cost of health care is devastating you financially, an effective solution could be medical debt consolidation. But what does the financial strategy entail? Let’s take a look at how medical debt consolidation works.

The Backstory

Nearly one-third of employed U.S. residents have some form of medical debt, a recent Salary Finance survey found, and some 28% owe at least $10,000, What’s more, 54% of those who have medical debt reported defaulting on their debt.

Medical Debt Consolidation

Before we get into how medical debt consolidation works, let’s define the approach. This kind of consolidation entails combining your medical bills and getting a loan to clean them up. A consolidation loan means you have just one payment and creditor with whom to concern yourself, as opposed to multiple payments to multiple creditors.

How to Consolidate Your Medical Bills

When it comes to medical debt consolidation, you do have choices. Those include a personal loan, credit card balance transfer, and home equity loan. Some debt management programs permit consolidation as well.

You can consolidate through banks, online lenders, credit unions, and nonprofit credit counseling agencies. Here is some info on options that can help with your debt:

Personal loan. You can take out a personal loan to erase your combined medical debts. Because medical debts usually don’t have interest charges, it would be more sensible to pay your medical provider monthly and avoid the interest charges attached to your loan.

If you do opt for a personal loan, just be certain to look around for the best interest rate you can get.

Home equity. You might want to consider dipping into your home equity and rolling medical debt into your home-loan obligation. These loans usually have the lowest interest rate charges for medical debt consolidation. Plus, the interest is tax deductible.

The rub, of course, is that you’re putting your house at risk for seizure should you default. If you go the home equity route, you must be sure you’re able to handle it.

Credit cards. Yeah, it’s easy to pull out the plastic and wipe out a medical debt but that’s rarely the best option due to high interest charges. A better tack is to let your medical provider know that you’re facing some challenges. The provider may then offer a payment plan, or you may get a reduced judgment.

How Will Consolidating Medical Bills Affect My Credit?

If you’re making your monthly payments, consolidating your medical bills can have a sunny impact on your credit score.

One important fact is that medical debt is treated differently than consumer debt: credit bureaus give medical debt a 180-day grace period before adding it to your credit report. Giving you slack lets you, where applicable:

  • Fix provider billing errors
  • Negotiate a payment plan
  • Hire a medical advocate to handle costs and payment plans for you
  • Establish a consolidation plan and payment arrangement
  • Learn whether you qualify for financial assistance from charities or other programs

The grace period also provides time for the insurance company to make approved payments. Note that if the medical debt is erased by an insurance company, it can be removed from your credit report. If you pay the medical debt yourself, the obligation may stay on your report for seven years.

So, that’s how medical debt consolidation works. Again though, there’s no interest attached to medical debt and you’ll usually have relatively more options regarding repayment terms. You also may be able to negotiate a lower repayment amount. It’s always best to try to go that route first.