Is Credit Card Protection Insurance Necessary?

By Debbie Dragon   

Insurance is one of the few things people buy with the hope that they'll never use it. In times of economic struggle, many people welcome the peace of mind that insurance plans offer. But when it comes to credit card protection insurance, who's really protected — you or the credit card industry?

Credit card protection insurance, also known as "payment protection plans" or "credit card loss protection," offers protection to policyholders should they become unemployed or disabled. Just like other forms of insurance, these plans are subject to government regulation. Policyholders pay monthly premiums for coverage and file a claim if they become ill or disabled, lose their jobs, or are otherwise unable to make their credit card payments. The cost of the plan is added to the policyholder's credit card balance and usually costs between 50 cents and 99 cents for every $100 of balance.

Depending on the specific terms and agreement of your protection plan, if you qualify to file a claim, you can stop making credit card payments for a certain period of time without fear of being reported to the credit reporting agencies or racking up late fees. Today, many credit card issuers offer "debt-cancellation plans," which aren't considered insurance policies and thus allow the company to avoid governmental regulation. Such protection plans are really just an additional contract between a lender and a borrower.

While the ability to stop making credit card payments when you're unable to work sounds good in theory, there are a number of problems with credit card protection that should make you think twice before you sign up. The most common problem with protection plans is that various restrictions make it extremely difficult to make a claim.

After paying for the protection for years, you may discover that, when you need to make a claim, you don't qualify or you have to meet certain criteria without any guarantee that the company will actually honor the plan. Many plans require that you exhaust all other options for obtaining money, including savings accounts and retirement funds, before you can file a claim. Also, plans that cover your minimum monthly payments when you become unemployed typically don't cover the loss of a job due to job performance. 

The cost of the plans may seem minimal, but the higher your credit card balance, the more you'll pay. For example, if you've got a $3,000 balance on your card and your protection plan costs you 89 cents, you'll be paying $26.70 per month; this monthly fee is added to your balance and will therefore accrue interest. If you carry a balance from one month to the next, you'll end up paying interest on the balance that includes your protection plan fee — and this can really add up.

These plans rarely cover part-time employees, seasonal workers or self-employed individuals. Chances are you won't learn this until after you've enrolled and spent time reading over the contract with a fine-toothed comb; even worse, you might not find out until after you try to make a claim. If you didn't qualify for the coverage to begin with, it won't matter how much you've paid into the plan — not only will you be unable to put in a claim, but you'll also be out the money you've already paid for the plan.

There may be some cases when it makes sense to purchase a credit card protection plan. Let's say, for example, you anticipate layoffs at your company in two or three months. Your credit card has a $5,000 balance. If the credit card protection plan premium is going to cost you around $50 a month, that's likely to be less than your minimum monthly payment. If you survive the layoff, though, don't forget to call and cancel the payment protection plan.

For most people, credit card protection plans don't protect you so much as they offer another source of revenue for the credit card industry.

Be careful of scams

Beware of "credit card loss protection" scams. With new credit card reforms to be implemented in February 2010, con artists are trying to take advantage of confusion over the new law. Scammers are telling consumers that laws limiting consumer liability to a maximum of $50 for unauthorized credit card charges no longer apply, and that credit card loss protection will close that gap in protection.

According to the Federal Trade Commission (FTC), "Worthless credit card loss protection offers are popular among fraudulent promoters who are trying to exploit consumers' uncertainty."¹ They caution consumers to avoid doing business with any company or phone caller who says:

• You're liable for more than $50 in unauthorized charges on your credit card account;
• You need credit card loss protection because computer hackers can access your credit card number and charge thousands of dollars to your account;
• A computer bug could make it easy for thieves to place unauthorized charges on your credit card account; or
• They're from "the security department" and want to activate the protection feature on your credit card.

More information regarding credit card loss protection offers can be found on the FTC website.

Footnote

1 "Credit Card Loss Protection Offers: They're the Real Steal," Federal Trade Commission Consumer Alert, October 2000