Your credit card company has probably offered to sell you some form of “payment protection” insurance. It may sound like a helpful thing to you to have. In reality, these types of insurance plans rarely provide much help to consumers. Instead, they generate income for the bank or credit card company.
Credit card companies, and banks that offer credit cards, will frequently try to sell customers some sort of what amounts to a type of credit card insurance. It might be called “payment protection”, or worded in a way that implies that your credit card bill will be taken care of if you lose your job, or a variety of other lovely sounding phrases. The problem is that the credit card insurance doesn’t live up to the promised benefits.
The Government Accountability Office has asked the U.S. Consumer Financial Protection Bureau to investigate the way that “payment protection” insurance is being sold, and being implemented.
In general, consumers are going to receive about $0.21 of benefit for every dollar that they spend on a debt protection service. In 2009, the nine biggest credit card companies collected $2.4 billion dollars in fees for “debt protection” products. However, they only paid out $518 million in benefits to customers.
Keep in mind that the credit card companies, and the banks, are not offering “debt protection”, or “payment protection” services because they care about your quality of life. This is a way for the banks and credit card companies to generate a profit.
If you really did lose your job, you cannot assume the credit card insurance that you have been spending money on will actually cover your entire credit card bill. It might cover part of the first payment, but, it isn’t truly going to provide you with the help that you may have been lead to believe it would.
There is a reason why the first thing you hear when you call your bank or credit card company is information about these types of insurance programs. It is the same reason why you usually have to sit through what amounts to an advertisement about “payment protection” when you call to activate a new credit card. The bank and credit card companies are, essentially, ensuring that their profit will be “protected”. They are not really protecting you.
It would be better for consumers to limit the amount of money they spend on their credit cards than to spend money on what amounts to “credit card insurance”. Spend only what you can pay off with your next paycheck. Try not to end up carrying a balance. This will reduce your need for “payment protection”, and it will also help you to avoid late fees, and having an interest rate added onto your balance.
Image by The Consumerist on Flickr