When you open your credit card statement, you might find an interesting offer: Purchase a credit card protection plan and if you become unable to make payments, the minimum payment is made on your behalf. Your account remains up to date, and you don’t have to worry about whether or not you can afford the payments during a financial setback.
Often, this type of credit card protection plan is referred to in layman’s terms as credit card insurance. The idea is that you receive a certain amount of protection if you are willing to pay the price, and most credit card payment protection plans charge a portion of your total credit card balance each month. Often, you pay between 79 cents and a dollar for every hundred dollars you have on your balance. For example, if your credit card insurance plan charges 89 cents for every hundred dollars and your balance is $1,500, you will pay $13.35 a month for protection.
Your “premium” is added to your balance, and you’ll have to pay interest on it just like your regular balance. If you carry no balance, then you receive the protection for free. Of course, if you don’t carry a monthly balance, there isn’t a need for the credit card insurance in the first place.
How Do You Qualify for Insurance “Payouts”?
Actually claiming credit card insurance can be very difficult. Most companies have a set of very stringent criteria, and even if you do qualify, you can lose your protections very easily. Here are some ways you could lose your payments:
- Non-payment for being fired: Some plans won’t cover your payments if you were fired instead of being laid off. Additionally, if you quit your job you might not be eligible to have your payments covered.
- Some cases of disability: While disability is often covered, this isn’t always the case. In some cases, if you have disability insurance, or if you have some other coverage, your minimums might not be paid as part of the plan.
- Limits on coverage: Double check the fine print to find out about coverage limits. Once the plan has paid out a certain amount, it will stop. There is also likely to be a time limit, so once payments have been made for six to 18 months, they might stop. Chances are, too, that you will only receive enough at a time to make a minimum payment, so you might only end up with $30 to $45 a month to make your payments. You likely won’t receive enough to pay off your balance.
- You may have to fill out forms: There are a number of forms that often need to be filled out. On top of that, if you don’t have the right documentation for your medical emergency or unemployment situation, your payments may be held up or denied.
- New job: Even if your new employment is only part time, any income can disqualify you for further payments.
Read the plan’s payout policy carefully. In many cases, you have to meet a very specific set of circumstances in order to qualify for payout. If you don’t meet those conditions, you will feel as though your monthly premiums have been wasted. Consider this example: You pay for the insurance for three years, spending $480.60 during that time. However, if there is a nine-month limit on your payouts and your $45 minimum payment is all that is covered, you will only receive $405 “back.”
Controversies Surrounding Credit Card Insurance
Credit card issuers make it very easy to opt in to these programs. A stray mark on the payment return coupon can mean enrollment. There are even cases of cardholders being signed up without giving their permission at all; finding out only through seeing a new charge on their statements. On the contrary, when it comes time to cancel your policy, many issuers make it very difficult, with long phone wait times being the norm.
There have also been reports of credit card insurers making late payments. Unfortunately, if that happens the cardholder will be held responsible for the late fees resulting from the issuer’s late payments.
All of these issues have led many consumers to complain about misleading marketing, and hidden fees. Many issuers are even being named in lawsuits, including Chase, Capital One, Discover, Bank of America, HSBC, and Barclays. Several states have also filed suit; Capital One has even settled one such claim with West Virginia. A federal investigation into credit card insurance programs remains pending.
An Alternative to Credit Card Payment Protection Plans
Instead of paying for credit card payment insurance, consider setting up an emergency fund. Every month, instead of having money added to your credit card balance, put money into a high-yield savings account That way you can earn interest on your money and access it at any time, instead of having to pay interest on your “premium” payments and being limited by restrictions.
The best option is to avoid carrying a balance in the first place, while at the same time saving up for a rainy day. One of the fastest ways to leak your wealth away is to pay interest on a credit card balance. Plus, if you don’t carry a balance, you are unlikely to need the credit card protection plan; you’ll have no payments to worry about. Add to that your growing emergency fund and true insurance coverage for disability, and you will be equal to almost any financial setback.
Image: baramee2554 / iStock.