Finance Globe

U.S. financial and economic topics from several finance writers.
7 minutes reading time (1362 words)

The Credit Card Protection Program

What is a credit protection plan?
A credit protection plan - also known as credit insurance - is an optional add-on with many types of loans, meant to protect your credit in the case that you are not able to pay your bills due to death, disability, or unemployment. Auto loans, mortgages, personal loans and credit cards may offer a credit protection plan to consumers.

It is illegal to require you to buy credit insurance to gain credit, and it is illegal to deny credit based on your decision to decline the credit protection coverage.

Credit insurance will only cover the account that is enrolled, and is very expensive, especially considering its limitations.

Some card issuers may resort to high-pressure sales tactics.
During the activation process of my new credit card, I was pitched the benefits of the card issuer's credit protection plan. The salesperson went on and on about the program, the risk to my credit rating if something were to happen, and how affordable the plan was. I wondered how much longer they were going to talk before I could tell them I didn't want to enroll. Finally, they gave me an opportunity to speak. I responded with a polite, "No, thanks."

The salesperson's response to my decline of the credit protection was that: 1) I'm taking a big risk with my finances if I don't enroll, 2) they would mail me a plan brochure so I could make an informed decision, 3) they would go ahead and enroll me now, and 4) I could cancel if I didn't like it after reading the literature.

It seemed that they had good practice in speaking without taking a breath, since they knew that a pause would give me a chance to cut in to decline the coverage. After what must have been a full page of script on the risks I'd be taking if I didn't enroll immediately, I was given a chance to respond.

Again, "No, thanks." As the card issuer's rep began a third attempt to sell me on the plan, I had to interrupt to tell them that if they were going to keep rewording their sales pitch until I agreed to it, that I did not need their credit card and they could close my new account immediately.

The sales attempt screeched to a halt, my card was activated, and they wished me a good day. I was both amused and irritated by the persistence of the sales rep; they were just reading a script and doing their job, but it helped me realize how desperately the card issuer wants to sell credit protection.

Why credit card insurance is a bad idea.
First of all, selling credit protection is a sneaky way for card issuers to raise a credit card's APR. The cost for their plan was $.79 a month for every $100 of my balance. This doesn't sound like much when they word it that way, but the premium on a balance of $2500 carried month-to-month would be $19.75/month, or $237/year, working out to roughly 9.5% annually. And that's on top of the annual interest rate of 9%. So, in effect, they were pressuring for me to let them more than double the interest rate I had been approved for.

In the case of my death, the protection would only cover that particular card, up to $10,000. If my credit card balance ever reached $10,000, not only would I have lost control of my credit card spending, but the coverage would cost me $948/year. A term life insurance policy for a female at my age and my state of health runs about $400 a year, and that's for $100,000 worth of coverage. That would be enough to pay for my funeral, all my debts, and still a good chunk left over to help the kids through college, as opposed to coverage that's limited to one credit card, and only paying out one-tenth of what the term life policy would.

The credit protection program would also pay the monthly minimum payment if I were to lose income due to becoming disabled or from losing employment. But all the while the minimum payments is being made, interest charges will continue to accrue. And you know how the minimum payment doesn't do much to eliminate a credit card balance.

Depending on the card's APR and the size of the account balance, it can take twenty to thirty years to pay off a balance by making minimum payments, and that's if no additional charges are incurred. So if I were to experience hard times, the credit protection would be merely keeping me from making late payments, but not help me get ahead of the debt.

Resist the persistent tactics used by card issuers' sales reps.
They'll give you statistics on how many people become disabled or lose their job each year. They'll remind you of the current uncertainty of our economy, and they'll try to convince you that you are doing you are doing yourself a favor by enrolling in their credit insurance.

They'll repeat and reword their sales pitch each time you decline the coverage plan, no doubt from a scripted sales pitch meant to rebut every possible response from the account holder. If you have adequate savings and insurance elsewhere, you can confidently refuse their high-priced insurance. Be firm, and let them know you already have the coverage you need without their program.

Paying extra for credit card insurance may even duplicate coverage that is available through our tax dollars. Keep in mind that workers compensation will provide benefits if you become disabled due to an injury at work. And, unemployment benefits are provided to help you if you unwillingly lose your job, as long as you meet your state's requirements for length of service. If you're worried about the possibility of a non-work related disability, you can look into temporary disability insurance through your insurance agent. Disability insurance can help you cover all your expenses, and not just the expenses incurred with a single credit card.

Protect your credit rating without credit card insurance.
The best way to protect yourself in the case of lost income is to have an adequate emergency savings fund. Financial experts recommend having three to six months' worth of living expenses in a highly liquid account, such as a savings or money market account.

We all naturally spend more when times are good, and instinctively cut back when times are rough, so you might not really need to save three to six times what you normally spend each month. If you experience hard times someday, you won't need as much money for entertainment and luxury items as you do now, and you'll be likely to eat at home more often.

Figure out the minimum you can get by on each month. Include all necessary expenses, such as your mortgage or rent, utilities, insurance, transportation and fuel, food, health care, and the minimum payments on your credit cards and other debts.

Three months' worth of expenses may be enough if you have little debt, and either a very secure job or a spouse or partner who also brings income to the household. If you have a lot of debt, your job is unstable, or you are the sole breadwinner of the family, then aim to save up six months' worth of expenses or even more.

Also, be sure you have adequate life insurance coverage if you have a family, or someone else who depends on you financially. Then, in the case of your death, your assets won't have to be sold off to pay your debts. How much life insurance you need depends on how much debt you currently have, and how many people the insurance proceeds must take care of and for how long, as well as the standard of living that you want them to be able to keep up. Obviously, a person who only has a working spouse will need less coverage than a person who is the sole breadwinner with a spouse and three young children. And, a single person with no dependants probably doesn't even need life insurance.
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Tuesday, 20 August 2019

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