Debt Settlement: How Its Works + Pros and Cons

November 25, 2020CreditBy toptierfinancial

Have you gotten an offer to pay off credit card debt for less than the total amount due?

This may seem like a gift. Settling $6,000 of credit card debt for $4,000, for example, leaves you with $2,000 you didn’t have to pay.

Instead of staying in perpetual debt, making monthly payments until the end of time, you can see a light at the end of the tunnel.

Or so you think.

While the debt may be gone and the collection calls may stop, settled debt can create other problems.

These problems include higher taxes, a big hit to your credit score for years, and having to come up with the money to pay the debt off in a lump sum.

For many people, the promises of debt settlement offers really are too good to be true.

Table of Contents:

How Debt Settlement Works
Negotiating a Debt Settlement
Using a Debt Settlement Company
DIY Debt Settlement
Is Debt Settlement a Good Idea?
How Much Does Settled Debt Affect Your Credit?
Debt Settlement Isn’t For Everyone

How Debt Settlement Works

In a debt settlement, a creditor agrees to reduce the principal amount you owe if you pay a lump sum that’s less than the full amount you owe. The lump sum can range from 40 to 80 percent of your balance.

Debt settlement offers can be initiated in several ways:

By a Credit Card Company: If you have a large amount of unsecured debt with a credit card company and have fallen behind on your monthly payments, you may get a letter from the company offering to settle the debt.
By a Collection Agency: If you’ve fallen way behind or defaulted on an account, the original creditor may have sold your debt to a collection agency. The agency could propose a deal.
By a Debt Settlement Company: If you’ve hired a debt settlement company to help you get out of debt, the company may hammer out deals with your credit card companies as part of a debt consolidation plan.
By You Directly: You could propose a plan yourself by contacting the credit card company directly. Be sure to get the agreement in writing before sending in money.

Debt settlement will work only with unsecured debt such as credit cards, personal loans, and other bills that have gone into collections.

If you’re behind on your mortgage or auto loan, you’re not going to be able to settle because a car can be repossessed and a house can be foreclosed on. Debt settlement also will not work with student loans in most cases.

Why Would Creditors Accept Debt Settlements?

Two situations could motivate your creditor to propose (or agree to) a settlement offer:

If you’ve missed monthly payments for several months.
If you are delinquent on the account.

If the company believes you can afford your payments, it’ll be less likely to settle.

However, if the company believes you may enter Chapter 7 bankruptcy, it will be more likely to propose or agree to a debt settlement agreement. Since credit card debt is unsecured, creditors wouldn’t get any money if you entered this kind of bankruptcy.

At least with a debt settlement, your creditor could recover part of the money you owe.

Can A Debt Settlement Offer Be Negotiated?

If you get a debt settlement offer, know that you can negotiate for a better deal. You can also contact your creditor first and ask for a settlement, or you can hire a lawyer or debt settlement company to seek debt collection settlements for you.

When you negotiate, let the creditor know about financial hardships you’re facing. If you have huge medical bills or just lost your job and have no income, your creditor or debt collector should know.

If a debt collector knows you can’t pay many of your bills, and that an old credit card bill with a sky high interest rate isn’t high on your priority list, you can get a better deal.

Paid In Full vs. Settled

If a creditor won’t drop to a lower payoff and you pay the sum they propose, ask to have your credit report show your debt as “paid in full” instead of “settled.” Settled debt can hurt your credit score for years.

Conduct your entire debt settlement process in writing. Get all of the details in writing, such as the payment amount and due date. Don’t send any money until you get the offer in writing and have reviewed it, possibly with a lawyer. It’s a binding contract and you should read the terms carefully.

Debt Settlement Companies

The do it yourself approach to debt settlement takes time and expertise. You could get professional help with your debt settlement process by hiring a debt settlement company to negotiate on your behalf.

Instead of paying your credit card issuer, you pay the debt settlement company directly an agreed-upon amount each month and the company pays your creditor after reaching a settlement agreement.

This strategy isn’t for everyone. It can get expensive, and your credit score could hit rock bottom. For many consumers, hiring a debt settlement company should be a last resort.

Pros & Cons of Debt Settlement Companies
Pros

They know how to negotiate with creditors.
By law, they can’t charge upfront fees.
They will probably be more successful at negotiating than you.

Cons

Your credit score will tank because you stop making payments.
Collectors won’t stop making collection calls in the meantime.
You’ll have to pay the debt settlement company 15% to 25% of your debt relief.

Debt Settlement Scams

You should also be aware that some of these companies have been found to be scams, or at least not totally honest with consumers.

The Consumer Financial Protection Agency filed a lawsuit in 2017 against Freedom Debt Relief, the nation’s largest debt settlement services provider. The lawsuit accuses Freedom of charging consumers without settling their debts as promised, makes customers negotiate their own settlements, and misleading them about fees.

Some debt settlement companies may insist you use an intermediary, when in fact you can contact a creditor yourself to settle.

Some of these companies advise people to stop paying on active accounts and to stop speaking with their creditors. Withholding payments to save up for a settlement can lead to interest and penalties.

Advance payment may be required by some debt settlement companies. The Federal Trade Commission (FTC) forbids this and only allows money to be collected once a debt is lowered or settled.

Do-It-Yourself Debt Settlement

When you have one or two delinquent accounts, I recommend handling your own debt negotiations. Just call the credit card company and ask about debt relief options.

You could ask for a lower interest rate, ask to skip a payment if that’s helpful, or you could ask to have late fees waived and punitive interest rate hikes rescinded.

Or, you could propose a lump sum payment in exchange for reporting the account paid in full to the credit bureaus. It never hurts to ask for the very best settlement plan for you.

And if your credit score still qualifies you for a new account, consider getting a balance transfer card to consolidate other accounts.

Don’t be nervous about settling with creditors. The most important thing is to have enough money in your savings account to pay a reasonable lump sum payment.

Be sure to ask your creditor to remove the negative entry from your credit report in exchange for your lump sum payment.

I’ll say it again: Get your debt settlement agreement writing before paying anything!

Pros & Cons of DIY Debt Settlement
Pros

Lessens the negative impact on your credit score.
No additional fees.
You can negotiate the removal of negative entries on your credit report.

Cons

You have to negotiate the settlement yourself which takes time and effort.
You probably have less experience negotiating with creditors than debt settlement companies.

Is Debt Settlement a Good Idea?

If you’re happy with a debt settlement offer you’ve received, then you may want to proceed.

But be aware of the downsides before you agree to the terms:

Forgiven Debt is Taxable Income

The Internal Revenue Service considers forgiven debt of $600 or more taxable income. If you owe $6,000 but agree to pay only $4,000, you’ll need to pay income tax on the $2,000 of debt relief.

An extra two grand in taxable income isn’t such a huge deal, but if you’re getting $20,000 or $30,000 in debt relief in one year, you could wipe out a chunk of your IRS tax refund. Then, you may owe even more on your state tax return.

Settled Debt Wrecks Credit Scores

Your credit score could continue to fall after a debt settlement agreement. Paying less than the original amount of debt will be reported to the credit bureaus as a debt settlement, which can stay on your credit report for up to seven years.

While a settlement is better for a credit score than having an account reported as unpaid, it’s almost as bad as having a bankruptcy.

Many debt relief companies want you to stop making monthly payments while they negotiate. They want the money you’d use on payments to finance a separate account they’d use to settle your debt. Trouble is, all the late payments and missed payments will also hurt your credit score for years to come.

The Lump Sum Payment

Sure you’re not having to pay the full amount, and that’s great. But the amount of debt you do pay will be due in one lump sum payment.

Let’s use our earlier example of $6,000 in total debt being negotiated down to $4,000. You’d have to come up with $4,000 in cash which isn’t easy, especially when you’re in debt!

You could ask for a payment plan, but few creditors agree to this. Even when they do, they’d probably want four payments of $1,000 — still not an easy chunk of change to cough up.

Debt Settlement Companies Have High Fees

If you’re working with a debt settlement company, expect to pay fees equal to 15% to 25% of the amount of debt settled. For $2,000 in debt relief, you’d owe $350 to $500 in fees.

The Scam Factor

People who shop for debt settlement programs are often at the end of their ropes. Unfortunately, some debt relief services take advantage of people in dire financial situations.

Before signing up with any debt settlement company, check with your state’s attorney general’s office about complaints. You can check with the Consumer Financial Protection Bureau or the Better Business Bureau too.

These red flags can be signs of a scam:

Wrong Types of Debt: If a company says it can help with secured debt such as a car loan or with a student loan, know that the company isn’t being honest. An auto lender would simply repossess your vehicle.
Too Good to Be True: If a debt management company says it can settle your debts for pennies on the dollar, walk away immediately.
Requests for Information: A legit debt settlement company or credit counseling service doesn’t need your bank account number. It should set up an escrow account both parties can access.

Bankruptcy May Be A Better Option

Debt settlement may be your last resort if you’re facing hardship and debt you can’t possibly repay.

Chapter 7 Bankruptcy may be a better way out. Bankruptcy could provide debt relief and let you start rebuilding your financial life right away.

Bankruptcy can stay on your credit report for 10 years, and you may still need to make payments toward your debt.

Nonprofit Organizations Can Also Help

The National Foundation for Credit Counseling could help you talk through your debt relief options.

A lot of consumers prefer this method since they know a debt settlement company seeks to make a profit from their debt management plans.

Nonprofits like the NFCC can help you create a debt management plan which considers your entire financial picture.

Nonprofits typically can’t take action for you, but a credit counselor could help you figure out what action to take.

How Much Does Debt Settlement Affect Your Credit Score?

Settled debt could knock 100 points off your credit score right off the bat. That’s a big hit. The blemishes could last up to seven years, but over time the impact should slowly diminish.

But you have to consider other factors, too.

Late Payments or Missed Payments: While you negotiate a debt settlement — or while a debt settlement company negotiates on your behalf — you could be piling up missed or late payments. These will affect your credit score.
Closed Accounts: If closing your credit card account is part of the debt settlement, the closed accounts could also hurt your credit picture. Part of your credit score comes from the amount of credit you have available.
Doubly Bad: If a collection agency has bought your debt, it could appear on your credit score twice: once through the debt collector and once through the original creditor.

How Long Does It Take to Improve Your Credit Score After Debt Settlement?

Eventually, your credit score should recover from the trauma of debt settlement and its associated derogatory credit marks. But your credit score may get worse before it gets better.

For the first three or four months after a debt settlement agreement, expect to see only bad news when you check your credit report. Over time, things will settle down. Assuming you don’t make new mistakes in borrowing, you could start to see an improvement within a year.

But for three or four years expect to have a hard time borrowing money. After that, your smart credit decisions will start to balance out your older mistakes. At that point, you’re on the road to recovery.

As I said above, you can speed up this process of recovery by getting your creditor to report “paid in full” instead of “settled debt” on your credit report. When you’re making a lump-sum payment, get this agreement in writing before sending a payment.

Debt Settlement Isn’t for Everyone

Debt settlement plans could reduce the total amount of credit card debt. On the surface reducing your total amount of debt makes a lot of sense.

But debt settlement can have negative consequences:

Your credit score will get worse before it gets better.
Lump sum payments can deplete your savings account.
The IRS will charge income tax on debt relief of $600 or more.
A debt settlement company will charge high fees for its help.

That’s why I consider debt settlement a last resort. Try these options first:

Credit counseling: Nonprofit organizations can help you gain perspective.
Balance transfers: If your credit score is strong enough, try to transfer your credit card debt to a new card with lower interest rates.
Consolidation: A debt consolidation loan could also provide debt relief.

Who Should Consider Debt Settlement Offers?

The best candidate for debt settlement is a consumer who faces a large amount of debt that’s unsecured. If the consumer isn’t concerned about a damaged credit score and can come up with cash for lump sum payments, debt settlement can save some money.

As always, before sending a payment, get your agreement in writing, and try to make your payment contingent upon the creditor removing negative information from your credit report.

The post Debt Settlement: How Its Works + Pros and Cons appeared first on Better Credit Blog | Credit Help For Bad Credit.

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What to Know before Opening Your First Business Credit Card

November 2, 2020CreditBy toptierfinancial

A business credit card is a valuable tool for just about any business. It does not matter the size, the age, or the business model—a credit card can provide much needed convenience and efficiency when used properly. If you are in the midst of launching a new business, or if your business is already established but does not yet have a business credit card, it is important that you understand a few key concepts. Here are six things you must know before opening your first business credit card.

Your personal credit score and history are important

The first thing you should know before opening a business card has nothing to do with your business or your creditor, and has everything to do with YOU. You should review your credit report and score, and make sure you know what range your credit score falls into (good, very good, excellent, etc.).

This is important because your personal credit history likely will be used in determining whether your credit card application is approved. Therefore, you will need to know your credit score to have a good idea of which cards you should consider. If you have excellent credit, then you can probably target any business card (including the “best” cards with favorable rewards). If your score is not as high don’t panic. You will just want to research which cards typically grant approvals to someone with your score and be strategic about which card to pursue.

You will be personally liable

Not only will your personal credit determine your ability to get a business card, but you will almost certainly be personally liable for your business card debt. That is because business cards typically require you to make a personal guarantee on the account. This is why your personal credit matters—the creditor will want to know how you handle debt personally because you will be ultimately responsible for the business credit card debt. And, this is why the creditor will require your social security number when you apply, even if you also provide an Employer Identification Number (EIN).

You will want to keep all of this in mind as you determine your business’ credit card policy and make decisions such as whether other employees will have company credit cards.

You should only use the card for business expenses

You have probably already been warned against “commingling” funds, which means you should keep your business finances and personal finances separate. This is true within your credit card accounts too. Most business credit cardholder agreements stipulate that they are “for commercial purposes only” (or they use very similar language to that effect). This means that when you open the card, you are promising not to use it for personal expenses. Now, a creditor will not nitpick every single transaction on your card to ensure that each is a business expense. But, if you develop a pattern of using the business card for personal expenses, that would technically be a violation of your agreement and theoretically could lead to the creditor cancelling your account.

You can get a business credit score

Your credit card can contribute to your business credit score (yes, there is such a thing!). This can be very helpful as your business grows. A good business credit score will help you access future business credit, including loans, with good terms. Also, having a good business score will allow for further separation between your business and personal credit.

While you can get business credit as a sole proprietor, and without an EIN, you may want to consider other options. Business types other than sole proprietorships are required to take additional steps that can be helpful in building business credit. That does not mean you should necessarily choose a different entity type; after all there are many successful sole proprietorships. But, this is something to keep in mind, particularly as your business expands and your need for business credit may increase.

Formalizing your business through proper registration with the state and incorporating it can help build your business credit by making it clear that you have an entity separate from yourself. Getting an EIN has a similar effect, and your business credit score will be tracked by your EIN. Many business types are required to have an EIN, but sole proprietors are not required to have one. A sole proprietor may apply for an EIN, though, and this could be helpful building a business credit profile.

Rewards are not taxable income but may affect your tax deductions

One of the biggest perks of a business card is that it can earn rewards. These can be used as discounts against your balance or on redemptions for other costs, like travel. The good news is that these rewards are not taxable income. However, they can affect how much you deduct as business expenses on your taxes.

Bankrate has a great summary about the implications of business credit card rewards. The most important point to remember is that if you use rewards for a business purchase, you cannot deduct the amount of the purchase that was paid for with rewards.

You should manage business credit like personal credit

Business credit is different than personal credit. And as we have discussed, you will want to keep the two separated at all times. Your business can scale and grow over time, and it might make sense to take risks with your business when opportunities arise. These are risks that you might not take with your personal finances. But, remember that you are liable at the end of the day.

So, the same rules of personal credit apply to your business credit. Your goal should be to manage it wisely. This means trying to pay off the balance in full every month to avoid interest charges. If used wisely, your business credit card can be a tool of convenience and it can earn you valuable rewards. Those features are much better than accruing interest. If you need to longer term financing, you will probably get better terms on a business loan.

Bottom Line

Business credit can be incredibly helpful for a business. The goal should be for your business to take advantage of the perks of having a credit card by using it wisely. If you do that, you will enjoy increased convenience, accrue rewards, and build your business credit score for future borrowing.

Keep these important concepts in mind as you move forward. The most important takeaway is that you are inevitably liable for the debt on your business credit card, so manage it carefully!

The post What to Know before Opening Your First Business Credit Card appeared first on NFCC.

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How Much Should You Plan to Spend on Utilities Each Month?

November 2, 2020CreditBy toptierfinancial

One of the keys to financial success is keeping a balanced and predictable budget. The most important categories in that budget are those that are critical to your health and safety. Most utilities fit into this category. You’ll want to ensure that you know what to expect for these costs each month. And, you will want to actively seek ways to lower your utility bills if they take up too much of your monthly budget.

How much should you pay for utilities each month? It may be better to think in terms of a percentage of your income rather than a flat dollar amount.

Budgeting by Percentages and Defining “Utilities”

Conventional wisdom has been to budget according to percentages for each major spending category. Many experts have recommended for decades that consumers should spend less than 30 percent of their gross monthly income on housing, though some give a range like 25 to 35 percent. This may go back to a government standard introduced in the 1960s. Is this still relevant today? Maybe. It certainly can be a helpful guideline, though it is far from perfect.

budget for utilities

An example percentage-based budget. Source: Michigan State University Extension.

A popular new budgeting approach is to use the 50/20/30 budget. In this model, housing is folded into your “basic needs,” which should be 50 percent of your income or less. This model may better reflect different costs of living in different locations.

Source: NerdWallet

However, neither of these methods account for utilities specifically. The “30 percent rule” really misses the mark here. Many experts have taken the 30 percent rule and added other categories like groceries, transportation, and insurance. All the categories are assigned a percentage, and together all the percentages add up to 100 percent. But often, no percentage is assigned to utilities. So, utilities fall under “housing.” This can be a problem because many people consider them to be two different expenses and may not account for utilities when calculating how much of a mortgage or rent payment they can afford. The 50/20/30 is better at accounting for utilities because it leaves a lot of wiggle room. However, it does not set a specific range for utility costs.

If you would like a specific rule to follow, then keep your utilities under 10 percent of your gross income. Though a good rule of thumb, ten percent is still pretty high, so think of it as a ceiling and keep the costs as low as you reasonably can. You should review the average monthly costs for common utilities in your area and budget for those amounts or more. Importantly, you must remember that your specific location and the square footage of your living space will determine how much you pay. But, knowing the average can be very useful to ensure that what you are paying is reasonable.

If you use the traditional budget percentages, remember that your 10 percent utilities budget is part of your housing budget. If you use 10 percent on utilities, that would leave only around 20 percent for your other housing costs. If you use the 50/20/30 budget, then the 10 percent is part of your 50 percent “needs” budget.

It might sound easy to keep utility costs under 10 percent of your income, but it is not easy for everyone. The less income you have, the higher the percentage of your budget you will devote to energy. The Natural Resources Defense Council reported in 2016 that low-income consumers were at risk of facing burdensome energy costs. That group had a “median energy burden” of 7.2 percent, meaning that a median of 7.2 percent of their monthly budget went toward energy costs.

This study only looked at “energy” expenses. It excluded water and secondary utilities like trash pickup and cable services. Therefore, once you add these additional expenses, it is easy to see how the costs could exceed 10 percent. Careful planning is important to limit your utility spending, especially when accounting for all utilities.

Budgeting for Your Total Utility Cost

To get an idea of what you should be paying for utilities, review your monthly bills, and cross reference them with these findings. You can also check with your local utility providers for more specific information, or consult with a realtor, neighbor, or anyone else who knows the specifics of your neighborhood.

Electricity

According to the most recent data from the U.S. Energy Information Administration, the average U.S. electric bill is $115.49. You can review all the data and look up the average for your state.

Water and Wastewater

A leading water-focused research group published a study last year, finding that the average bill in the U.S. for water and wastewater was $104 total.

Gas

Rocket Mortgage reported in 2017 that the average monthly gas bill was just above $55. It also reported state-by-state data that you can review.

Garbage Removal

The utilities listed so far are all necessities. Some homes may not use gas, but those that do rely on it for critical tasks like heat or cooking. There are other utilities that are very nice to have, but don’t quite rise to the level of being necessities.

One of those is garbage removal. You can probably expect to pay between $20 and $50 for garbage removal in most cases.

Phone, cable and Internet

Phone, cable and Internet costs are also not necessary and can vary widely. Unlike electricity, which costs more as you use more, typically these services charge a flat fee. The best way to save money is to pick the most affordable services upfront. These days, there are very low-cost cell phone plans, and many people choose to skip cable and opt for a cheaper streaming service instead. For Internet, you may be able to save money by opting for a slower speed, since oftentimes the upgraded plans do not make enough difference to warrant the cost.

For a family of two adults, a conservative budget for these expenses might be around $100 per month. However, these costs could easily creep to $200, $300 or more if you do not shop around, subscribe to many services, or opt for expensive options.

Making Changes

If you need to get your utility costs under control, the two best ways are to use less and to shop around. NerdWallet has put together 15 easy ways to lower your utility bills. Most of those focus on weatherproofing, stopping leaks, and so forth. Don’t forget about negotiating and checking prices with different companies. If it has been a while since you last shopped around for utilities, it may be worth doing so again to see if you can get better pricing than you are currently paying.

Another idea would be to get a roommate who could share the costs with you, though this will not be feasible for everyone.

Recap

Utilities can add up very quickly and take a big chunk of your budget. Unfortunately, many traditional budget models do not properly account for these costs. Try to spend no more than 10 percent of your monthly income on utilities, and take simple steps to lower these costs as low as you can.

If you are struggling to pay utility bills or other bills, contact a credit counselor who can work with you to figure out your best options moving forward and do a thorough review of your budget.

The post How Much Should You Plan to Spend on Utilities Each Month? appeared first on NFCC.

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Handling Medical Bills: What is the best way to pay?

October 24, 2020CreditBy toptierfinancial

Medical bills are never fun. In fact, they can be overwhelming. Whether you have a routine, planned procedure or have to receive emergency medical treatment, chances are that you will end up with a bill higher than you were hoping to receive. The best-case scenario is that you can pay the balance without any difficulty. The worst-case is that the bill is unmanageable and you cannot pay. Thankfully, there are some tips and strategies that can make your medical bills less expensive and help you pay them off effectively.

First Steps to Take

We are going to get into the nitty gritty of how you should pay your medical bill—as in which payment method you should use. However, there are some important steps you will want to take first to ensure that your medical bill is as low as possible.

Reviewing Your Bill and EOB

First, be sure that you review your bill after it goes through your insurance. Your insurer will send you an Explanation of Benefits (EOB) that details the portion of the bill that was covered by insurance. It should also list the remaining balance owed, which is what you are responsible for paying. If you receive a bill from your care provider with an approaching due date, and have not received an EOB, you should contact your provider and your insurer to see what is going on.

Also, be sure to get an itemized copy of your bill. A bill from your doctor that just shows a total due is not very helpful and leaves plenty of room for error. Make sure you receive a copy that details each individual charge. If your doctor does not provide this automatically, you should call and request such a copy.

Negotiating

Once you know how much you owe, consider negotiating. You can negotiate with the health care provider and with your insurance company. Sometimes, billing errors occur when a health care provider lists a treatment with a particular code that is not covered by your insurance company. Sometimes this is a misunderstanding, and a simple change of code will allow you to have coverage—and therefore owe less—for the given treatment.

Even if the coding is correct, you can try negotiating with the healthcare provider. You have a few tactics at your disposal if you face a high bill. You can review the Healthcare Bluebook and use its data as leverage. This tool tracks pricing for various procedures, tests, and services by location. You can research your local area and determine how your provider’s cost compares with the average in the area. This may give you evidence that you are being overcharged, which could sway a provider to lower your bill.

It never hurts to ask for a balance reduction, even if you cannot provide evidence that you have been “overcharged.” Explain your financial situation and why the bill is unaffordable, and ask to have the amount reduced. You might ask to pay the Medicare rate, which would represent a steep discount in some cases. You can also offer a lump sum settlement in which you make a large payment, short of the full balance, and the provider accepts it as a full payment.

Lastly, consider financial assistance. Ask the provider if they have a formal financial aid program. Many large providers have a formal program. Typically, you will have to fill out a detailed application, including your employment, income, and other personal information. If you qualify, this may lead to significantly lower costs or a favorable repayment arrangement. Even if you do not qualify, you can try negotiating the repayment process rather than the actual balance. Try to get on a repayment plan that is affordable and, ideally, interest free.

Which Payment Method Should You Use?

If you are able to pay, whether you make a one-time payment to eliminate the balance or a monthly payment on a plan, you should probably pay in cash, check, or debit card. Why not pay with a credit card? Well, you can pay with a credit card if you have the funds available and will immediately pay off the credit card balance. But you do not want to pay on a credit card if you cannot pay it off in full right away.

Why? Because putting the medical debt onto a credit card is almost always going to be less favorable. Many providers are willing to provide a zero-interest or low-interest repayment plan. By moving the debt to a credit card instead, you are giving up that fantastic benefit and moving the account to a credit card instead. This means that the debt can pile up interest and fees much more quickly.

One potential exception might be if you qualified for a credit card with excellent terms, such as a zero-percent balance transfer card. There may be some cases where this would be a smart move and save you money versus a repayment plan with your provider—particularly in a case where you were not given a repayment plan option. However, this will probably only make sense for someone with an excellent credit score who can get the best credit card terms.

A similar exception may exist if you qualify for a medical credit card (which can be used only for qualifying medical expenses). These also typically offer a promotional interest free period, but are typically available to borrowers who do not have excellent credit. These may look like an attractive option. However, the interest rates on these cards typically explode after the promotional period, so you have to be very careful. Again, an interest-free arrangement directly with your provider would be much better than a credit card.

Paying Overdue Medical Bills

So far, we have been discussing how you should handle the repayment of a medical expense soon after you are charged. But what about medical bills from the past that are overdue? When a medical bill is past due, it could hurt your credit. Your health care provider could report the delinquency, and could send the account to collections.

Providers usually wait anywhere from 60 to 180 days to send an unpaid balance to collections. Thankfully, the credit bureaus give you a 180-day grace period before allowing a medical debt to appear on your credit report. Additionally, changes to the FICO scoring model have limited the impact of medical debt. Medical debt is not weighted as heavily in the FICO 9 scoring model as it had been previously. Also, collection accounts that you pay off or settle are disregarded in your credit score for FICO 9 and the new FICO 10. However, while FICO continues to release these new scoring models, lenders are very slow to adopt them. Therefore, you may not be able to fully realize the benefits of the way FICO now treats medical debts; it will depend on the lenders that you use down the road.

Regardless of the scoring model in question, there are some things to keep in mind. First, remember that you can negotiate with collectors. You may be able to offer a lump sum payment for less than the full balance. This would have a positive impact on your credit score in the FICO 9 system. Second, you should avoid paying with a credit card and should use cash, debit card, or a check instead. A medical debt in collections has already done some damage to your credit. Yes, under FICO 9 and 10 you can essentially undo this damage. But that benefit is not worth the risk of putting the account onto a credit card if you cannot pay it in full immediately. Putting the account on a credit card opens up the possibility that the new credit card debt could become too much to handle and lead to another round of derogatory marks on your credit report. Skip that risk altogether.

Bottom Line

If you are facing a medical bill, remember that you have numerous options at your disposal. You should proactively communicate with your healthcare provider to make sure you are billed accurately and to explain your financial situation. When it comes time to pay, your best bet is to use cash, a check, or a debit card. You may not be able to pay in full, which is why getting on a payment plan is so helpful. Just remember that you want to avoid taking on new debt, especially credit card debt which has fewer safeguards than medical debt.

For more help navigating your medical debt or credit card debt, consider working with a credit counselor.

The post Handling Medical Bills: What is the best way to pay? appeared first on NFCC.

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