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Credit Protection Insurance -- Just Another Consumer Rip-Off
By: Charles Phelan
Credit protection insurance is a good example of a consumer rip-off that affects
millions of people, yet receives 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 an 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 in full every month, 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 85 cents 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.
About the Author:
Charles J. Phelan has been helping people become debt-free without bankruptcy
since 1997. A former executive in the debt settlement industry, he teaches the
do-it-yourself method of debt negotiation. Audio-CD material plus expert
personal coaching helps consumers achieve professional results at a fraction of
the cost. http://www.zipdebt.com |
