Credit protection insurance
Credit protection insurance is a good example of consumer fraud that affects millions of people but receives little attention in the financial media. In short, you should never buy a “credit protection insurance” or a “payment protection plan” or any other similar type of credit insurance. Let’s take a look at how these programs work and why they are a bad deal for the average consumer.
First of all, we ignore the fraudulent version of this insurance. With identity theft in the news lately, scammers set up telemarketing booths to call people and try to scare them into buying worthless credit insurance products. The representatives will try to convince you that you are at risk if someone takes your card and starts making fraudulent purchases on your behalf. When they call, they can also pretend to be from the “security department” of their bank. In fact, they can be part of a network of identity theft, with the aim of letting you disclose personal information over the phone. Or they could simply try to make money by selling an insurance policy that you absolutely do not need.
Under federal law, unauthorized use of your credit card will result in a maximum limit of $ 50. If you have not authorized a charge, do not pay it! Follow the procedure of your credit card to contest the false accusations. You do not 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 major credit card banks? These are plans that promise to cover minimum monthly payments over a long period of time (typically 12 to 24 months) in the event of dismissal from work, hospitalization due to an accident or illness or disability. On the surface, a plan like this sounds like a great idea. After all, how can you keep payments if you suddenly lose your job or get too sick to work?
Of course, you should not carry balances on your credit cards anyway. If everyone pays their full balances every month, credit protection insurance would not even exist in its current form. You are charged for the insurance depending on the amount of debt you are carrying with the card, so if the balance is zero, there is no cost. In fact, some bank representatives use it as part of the sales plan when they try to attract people to register for that “3 month free trial” in their payment protection plan. They try to convince you to add insurance now, as long as you do not need it and when there are no costs, with the hope that you will one day start balancing. At that point, you may have forgotten you signed up and are wondering what mysterious accusations are on your statement each month.
If you have card balances, credit protection insurance is still a bad deal. To see why, let’s see the calculations here. A typical loss protection plan costs 85 cents for every $ 100 of balance carried on the card. So if you have a $ 5,000 debt on your credit card, it will cost you $ 42.50 a month to buy insurance. Over the course of 12 months, you will spend $ 510 in this scenario.
This is equivalent to paying an additional 10% annual interest!
A light bulb should shine on your head right now. Why not take the same $ 42.50 a month and use it to pay your balance faster? Good question If you consider that most consumers who have a credit protection year after year, without being eligible for a claim against the insurance policy, the amount of money wasted can add up to a truly staggering sum.
Continuing with our example of $ 5,000, with a typical minimum payment of $ 125 / month for 26 years will pay the balance in full, at a cost of $ 7.115.42 in interest. In applying these additional $ 42.50 a month, which otherwise would have gone to insurances, with a total monthly outlay of $ 167.50, the debt will be repaid in just 40 months! And it will have saved $ 5,435.22 in interest. There is no point in wasting this money, especially considering that the credit protection plan is generally only valid for 12-24 months.
There is another important factor involved here. Credit protection is also a bad business because the eligibility requirements are very restrictive. When you read the fine print, you will find out that there are all kinds of situations that are not covered. Let’s say, for example, that you fought a medical condition for some time. So buy the insurance thinking it’s a good idea. In the end, you end up in the hospital to receive treatment and recovery. Can you breathe a little more easily knowing that your credit card payments are covered? NOP. Most of these policies have exclusions for pre-existing conditions. And there are numerous other loopholes that allow the bank to deny your request according to the policy. In view of the very poor mathematics and the restrictive nature of this type of insurance, these programs should really be called “bank protection protection” instead of “credit protection insurance“. Instead of spending money on an insurance plan that you will probably never use, it is much better to apply the same amount to pay the upfront debt.