Credit Protection Insurance Just Another
Consumer Rip-Off
Credit protection insurance is a good
example of a consumer rip-off that affects millions
of people, yet gets little attention in the financial
media. Simply stated, you should NEVER buy "credit
protection insurance," or a "payment protection plan"
or any other similar type of credit-related insurance.
Let's take a look at how these programs work and why
they are a bad deal for the average consumer.
First, let's dispense with the scam
version of this insurance. With identity theft in
the news so much lately, con artists have set up telemarketing
boiler rooms to call people and try to scare them
into buying worthless credit insurance products. Representatives
will try to convince you that you're at risk if someone
gets hold of your card and starts making fraudulent
purchases in your name. When they call, they may even
pretend to be from the "security department" of your
bank. In fact, they may actually be part of an identify
theft ring, with the goal of getting you to disclose
personal information over the phone. Or they may simply
be trying to make a fast buck by selling you an insurance
policy that you absolutely don't need.
Under Federal law, you are limited to
a maximum of $50 liability for unauthorized use of
your credit card. If you didn't authorize a charge,
don't pay it! Follow your credit card bank's procedure
for disputing bogus charges. You simply don't need
insurance to protect yourself from a situation that
is already covered by Federal law!
Now, what about those "payment protection
plans" offered directly by the big credit card banks?
These are plans that promise to cover your minimum
monthly payments for an extended period of time (usually
12-24 months) if you get laid off from your job, become
hospitalized due to accident or illness, or become
disabled. On the surface, a plan like this sounds
like a pretty good idea. After all, how could you
keep up with your payments if you suddenly lost your
job or became too ill to work?
Of course, you should not be carrying
balances on your credit cards anyway. If everyone
paid their balances every month in full, then credit
protection insurance would not even exist in its current
form. You are charged for the insurance based on the
amount of debt you're carrying on the card, so if
the balance is zero, then there is no fee. In fact,
some bank representatives use this as part of the
sales pitch when trying to entice people to sign up
for that "free 3-month trial" on their payment protection
plan! They attempt to talk you into adding the insurance
now, while you don't need it and when there is no
cost, in the hope that one day you will start carrying
a balance. By then, you'll probably have forgotten
you signed up, and you'll wonder what those mysterious
charges are on your statement every month.
If you do carry balances on your cards,
credit protection insurance is still a very bad deal.
To see why, let's look at the math here. A typical
loss protection plan costs $0.85 for every $100 of
balance carried on the card. So if you're carrying
a debt of $5,000 on the credit card, it will cost
you $42.50 per month to buy the insurance. Over the
course of 12 months, you will spend $510 under this
scenario. That's equivalent to paying an extra 10%
in annual interest!
A light bulb should be shining over
your head right about now. Why not take that same
$42.50 per month and use it to pay down the balance
faster? Good question. When you consider that most
consumers who have credit protection carry it year
after year, without ever becoming eligible for a claim
against the insurance policy, the amount of wasted
money can add up to a truly staggering sum.
Continuing with our $5,000 example,
with a typical minimum payment of $125/month, it will
take more than 26 years to pay off the balance in
full, at a cost of $7,115.42 in interest. By applying
that extra $42.50 per month that would otherwise go
toward the insurance, for a total monthly payment
of $167.50, you'll have the debt paid off in only
40 months! And you'll have saved $5,435.22 in interest
charges. It simply makes no sense to waste this money
, especially when you consider that the credit protection
plan is normally only good for 12-24 months anyway.
There's another important factor involved
here. Credit protection is also a bad deal because
the eligibility requirements are so very restrictive.
When you read the fine print, you'll realize that
there are all kinds of situations that aren't covered.
Let's say, for example, that you've been fighting
a medical condition for some time. So you buy the
insurance thinking it's a good idea. Eventually, you
end up in the hospital for treatment and recovery.
Can you breathe a little easier knowing your credit
card payments are covered? Nope. Most of these policies
have exclusions for pre-existing conditions. And there
are numerous other loopholes that allow the bank to
deny your claim under the policy. In view of the lousy
math and the restrictive nature of this type of insurance,
these programs should really be named "bank profit
protection" instead of "credit protection insurance."
Instead of spending good money on an insurance plan
that you will probably never use, you're far better
off applying that same amount toward paying off the
debt early.
Charles J. Phelan has been helping consumers
become debt-free without bankruptcy since 1997. A
former senior executive with one of the nation's largest
debt settlement firms, he is the author of the Debt
Elimination Success Seminar, a five-hour audio-CD
course that teaches consumers how to choose between
debt program options based on their financial situation.
The course focuses on comprehensive instruction in
do-it-yourself debt negotiation & settlement designed
to save $1,000s. Personal coaching and follow-up support
is included. Achieves the same results as professional
firms for a tiny fraction of the cost.
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