The Reason 37% of Families Are Forced to Rely on Credit Cards

by Maurie Backman | Updated July 21, 2021 - First published on Feb. 23, 2020

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Hint: It relates to an unavoidable expense.

Credit cards may be a helpful tool for consumers, but they should be used for the convenience and benefits they offer. A large number of families, however, fall back on credit cards out of necessity, and new data shows that medical costs are largely to blame.

An estimated 69% of families with children say they're making sacrifices to keep up with their medical expenses, according to a recent Aflac survey. And for 37%, that means relying on credit cards to pay their bills, and deal with the aftermath.

The problem with credit cards

Credit cards are a great way to earn rewards for the things you're already buying. It's when you fail to pay them off, however, that you run into trouble. 

Any time you carry a credit card balance, you automatically sign up to pay interest -- expensive interest -- on the things you charged. Not only that, but too much credit card debt can negatively impact your credit score by driving your credit utilization into unfavorable territory. Utilization speaks to the amount of available credit you're using at once, and a ratio above 30% is considered harmful to your score. 

But if you're forced to rely on credit cards to pay your bills, and you rack up a high enough balance to exceed that 30% threshold, your credit score is likely to suffer, making it more difficult for you to borrow money the next time you need to.

Avoiding credit card debt due to medical costs

If healthcare expenses are driving you to have an unhealthy relationship with your credit cards, your best bet is to rethink your budget and do your best to build some emergency savings. That way, you'll have cash reserves to tap when your medical bills come in higher than expected. 

Ideally, your emergency fund should have enough money in it to cover three to six months of essential bills, but if you can't hit that target, save as much as you can. A good bet, in fact, is to sock away enough cash to cover your annual deductible, since you'll need to pay it before your insurer picks up the tab for your healthcare services. 

At the same time, factor healthcare into your budget in a realistic fashion. Take a look at what your insurance premiums, deductibles, and copays cost, and figure out how much you should reasonably expect to spend each month. And also, account for those one-off situations that may pop up on occasion, like a hospital visit. You don’t need to plan on one every month, but it wouldn’t hurt to budget for one visit a year. Aflac reports that 37% of families who went to the hospital within the past two years had to pay $500 or more out of pocket. Meanwhile, 23% spent $1,000 or more, so if your costs are similar, divvy that figure up among 12 months so you’re setting money aside as you need to. 

Finally, take advantage of a health savings account, if you're eligible for one. To contribute to one of these accounts, you must be enrolled in a high-deductible health insurance plan, defined currently as an individual deductible of $1,400 or more, or a family-level deductible of $2,800 or more. The funds you allocate to a health savings account go in tax-free, which means you reap instant savings yourself, thereby lowering your financial burden on a whole and making it easier to keep up with your healthcare spending. 

Medical bills are often unavoidable, but they can also wreck your finances if you're not careful. If your healthcare expenses are driving you to rely on credit cards to an unhealthy degree, it's time to come up with a better plan -- before you wind up in a world of debt with no escape in sight.

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