Should You Get a Credit Card Payment Protection Plan?
source: mujitra via flickr
Credit card payment protection plans offer relief when you are out of work or sick. Your entire balance may be waived, for instance, in one of these emergencies. The cost is usually a percentage of your monthly balance, on the order of 1 to 2 percent. With a 1 percent fee, for example, you would pay $1 for every $100 charged. There is no fee if you don’t charge anything.
Is this plan worth doing?
I needed to make this decision earlier in the week. Ideally, I would have researched the facts and made an informed decision. But the circumstances were against me.
I was in a store and I didn’t have internet access. Even if I did, I didn’t have the time to research because I was holding up the line. I didn’t like it, but I had to make a gut call.
When faced with new situations, experts make comparisons to the familiar. Managers think about similar Harvard case studies. Coaches study film on their opponents.
Treat my analysis in a similar vein—as an educated guess based on my experience.
I had about 30 seconds to think, so I relied on my three-step decision framework:
- Think strategically
- Run the numbers
- Think about risk
Think strategically
This is the most powerful step you can take when analyzing any financial offer. What are the incentives of the person selling?
I thought about a similar situation: long-term disability insurance at work. This is a case where insurance will cover a large portion of your salary if you get sick. It makes perfect sense why a company would offer this plan—they want to develop enduring relationships with productive employees.
I didn’t see the same symbiotic relationship with credit card companies. They might care more about short-term profit, as payments off of high interest rates line their pockets. What is their stake in relieving the debt from an individual customer? It sounded fishy to me on a strategic level.
Run the numbers
The plan had a 1.5 percent fee for the monthly balance. If I charged about $100 a month, for instance, that would cost me $1.50 x 12 = $18 a year.
That’s not a lot of money, but it would be enough to buy a modest restaurant meal.
What is the benefit? I pay my credit card each month, so when I did fall ill, I would probably have one month’s balance outstanding, about $100.
Do I really want to spend $18 a year for the expected benefit of a one-time $100 debt relief?
This doesn’t sound that appealing.
Think about risk
There is another reason the plan doesn’t make sense: I have money stored for such emergencies.
I am a big fan of “emergency funds” or “rainy-day funds” where you keep cash for unexpected expenses. Experts vary on how big this fund should be. I’ve heard ranges from the low end of $1,000 to the high end of 3 to 6 months of living expenses. (Here is a good article from Wisebread.)
I am on the conservative side and use an online-savings account for my short-term funds. I certainly would have enough to cover a $100 balance even if I went ill or lost my job.
Impression: Plans are not worth it
The costs are hard to justify. The benefits don’t seem overwhelming, especially if you have an emergency fund.
There was one more compelling reason not to sign up right away: it would have been an unnecessary commitment.
When companies offer additional services, you can almost always sign up for them later. If you commit early, you risk forgetting about it and losing money until you cancel. If you wait until you might reasonably need it, you stand a better chance of following through and having it when you need it.
You’ve heard my thoughts and now I want to hear yours. What’s your take on credit card payment protection plans? Has anyone signed up and found it useful?
If you’re come across or written an article on this topic, feel free to add a link in the comments. I want to add an appendix with the full research.
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20 Responses to “Should You Get a Credit Card Payment Protection Plan?”
I kind of agree with you – if you plan ahead, you shouldn’t worry. For example, if you put that $18 a month aside, and a year later you get sick…voila, there’s your credit card bill.
By Christina on Jun 26, 2008
Oops, I reread it, and you said a year, so I guess not so much, but I still agree.
By Christina on Jun 26, 2008
Christina: You bring up another good point I didn’t explicitly state. Many of us healthy and productive workers won’t need disability help for years, so the fees probably will wash out the benefit.
By Presh Talwalkar on Jun 26, 2008
So, don’t insurance companies make money by *denying* claims? This protection sounds great on paper but I bet the terms protect them from really paying off your balance if it exceeds a certain amount, so it’d really only provide a month or two’s worth of normal expenses, which if you have that emergency fund around, you’re covered.
By RohoMech on Jun 27, 2008
RohoMech: Good point. My terms had a $10,000 maximum and I bet there are other loopholes too.
By Presh Talwalkar on Jun 28, 2008
Question –
I actually got a suggestion for a credit card protection plan in the mail the other day. I laughed, and was about to throw it out, when I actually took a second to read it.
It said that you had to pay something for every UNPAID $100 of your balance. So, theoretically, if someone pays off their balance every month, it’d be free?
I’m still not doing it, mainly just because of a distrust of agreeing to anything that allows a credit card company to charge me money, but thought I’d mention it.
By Christina on Jul 3, 2008
Christina,
unlike interest rates, the balance does not need to be paid off in full for the credit protector to auto deduct the money from your account each month. Most major credit cards will deduct the amount based on your spending, EVEN if you pay off your entire bill.
Presh,
I think the example of more typical spending of $1000 a month on a credit card used to analyze the increased worth of $180 in premiums annually on credit protector might yield a more realistic sum to determine the value of the service. In my mind, using well planned emergency funds or in the instances of forgetfulness, using auto minimum payments, seem to be superior to a costly credit protector plan.
By jeff on Jul 9, 2008
Jeff: You’re absolutely right that $1,000 would be more realistic. I lost sight of that since I was analyzing the store card.
I like that you mention automatic payments as another way to reduce risk. I also have another rule: pay off the bill when it comes, not when it is due. This reduces forgetfulness and also risk about timing. I can’t tell you how many times people schedule a payment a few weeks later, are short in the bank, and then have to deal with an overdraft.
By Presh Talwalkar on Jul 10, 2008
Let’s paraphrase the “petty” $18 you will have to pay a year if you keep your balance at an average of $100, and the fee is just 1.5% a month. The 1.5% monthly rate is equal to 18% annual rate. Now add that up on top of usual 15-20% credit card APR, and you end up with a hefty 40% APR !!! No wonder credit card companies will try to hook you up on these plans at all costs. If people are complaining about credit card industry being evil, the Payment Protection Plans are far far beyond that.
Don’t get dissillusioned about the benefits as well. The plan WILL NOT protect you if you miss any monthly payments. You will get your usual late fee charge, and any other penalties applicable.
By GG on Jul 29, 2008
GG: Well said-when you convert the fee into an APR it’s a tremendous cost for a service that’s unlikely to be helpful.
By Presh Talwalkar on Jul 30, 2008
Sorry I’m late with this comment – late being better than never!
It would seem then that there is a consensus not to take out the credit card issuer’s recommendation of a payment protection plan.
Personally I would not take one out either in part due to the over-all cost of it and also due to the small print being inevitably confusing, as is often the case.
However, in current times of credit crunch, how to protect oneself against the possibility of sudden unemployment if you are in the habit of carrying a reasonable balance on your credit cards?
All thoughts welcome, thanks.
By Joseph on Jan 11, 2009
Good question. I am reminded that urgent care and preventative care will be different. There are diets to prevent heart disease, but if you see someone with a heart attack, you don’t lecture them but rather operate and give them statins.
Similarly, a 6-month emergency fund and an active networking schedule (to passively job search) are the expert preventative recommendations for sudden unemployment. Not carrying credit card debt is also part of the prevention. Products like payment protection could be possible “urgent care” methods, but just like standard medicine these financial “cures” come with some strong side effects.
By Presh Talwalkar on Jan 12, 2009
I bought into a protection scheme, and have been paying them about $9.00/month for 2 yrs. $216 bucks now. My wife lost her job due to a reorganization and her position was eliminated. I placed a call to my “protection plan” and got the paperwork in the mail.
First you must be unemployed for 60 days or more.
Second there is a section that the Employment agency has to fill out, and that will cost you approx. $25.
Once the paperwork has been completed and you have supplied them with the 1st and most recent payment stub from the State Employment office. You send it in pending approval which could take up to 10 weeks to approve. Not only that but you must keep your account current under the terms of your Cardholder agreement. If you don’t make your minimum payments you will be ineligible.
This has got to be “another” one of the biggest ripoffs that the American public has out there. As for the $216 bucks? Lost, Gone, Never to be seen again. Don’t buy into the game. Just Say NO!
By Phil Penne on Jan 20, 2009
I’m so glad you shared your experience, Phil, as it confirms what many of us suspect about such plans–they are schemes by credit cards to prey on our fears rather than true insurance means. We can all learn from your experience
By Presh Talwalkar on Jan 22, 2009
My MIL is hospitalized with severe heart problems. She’s retired. My FIL asked us to take care of their bills for now (using their checking account). She said she has credit protection on 1 or 2 cards. I see where she’s being charged a monthly fee on 1 of them. Since she’s retired, she hasn’t lost her job, her SS will still be coming in, so in a situation like this, is the credit protection protecting anything? I don’t see where it is beneficial to a retired person at all. Am I missing something here?
By Alice on Feb 23, 2009
but if you have taken a protection plan with the credit card
can you cancel it just by stopping the direct debit without suffering any penalty?
or you have to ring them up and ask them to stop
it?
By andrea on Apr 26, 2009
We took out this type of protection on our credit cards and they refuse to pay. Do not take this coverage out, as these companies will keep requesting more information and telling you that you filed your claims to early (have to wait 31 days, we filed initially after 29), tell you they have not received the ADDITIONAL paperwork needed (even though you have confirmation that it was received) We have messed with this for 90 days and still nothing. We have paid both Wells Fargo and Best Buy for this protection for years and now that it is needed NOTHING. It is a RIPOFF, don’t do it.
By Phyllis on May 23, 2009
I would like to share my experience with WAMU (now CHASE).
I put credit protection on my credit cards 2 or 3 months before I was laid off (I suspected the layoff). I was laid off at the end of November 2008. The credit protection doesn’t make the payments, it just keeps the interest from accruing, prevents any late payments, and keeps your credit intact until you are reemployed. My FICO scores were 681, 683, and 704(not great, but not bad either)
Unfortunately the cards were with WAMU. (they are predators). I called them to start the insurance coverage and they told me that all I needed was to have the coverage on one account and it would cover both accounts.(should have gotten that in writing).
I have jumped through all the hoops of proving that I am still unemployed by sending the Unemployment Dept. records to them each month.
When Chase(also predators), bought out WAMU, they told me that the larger of my cards was not covered because I didn’t have protection on it. I fought them on this and told them my agreement with WAMU said that it was covered. After much discussion on this, they finally started the coverage on the card. A couple of months ago in July 09, Chase notified me that they had closed the larger account, due to:
1. Total available credit bankcards is too low
2. One or more accounts have high balances compared to credit limits
3. Too many bankcards with high balances
(Also, if your account is closed, the credit protection is canceled).
Supposedly they ran a credit check through Experian. I requested a copy of my credit report (you can get it free if you have been denied credit or they cancel your credit card). I looked in the section where it shows who has requested your credit and Chase hadn’t done a check since January 2009. They for some reason didn’t close the other account due to the credit check. hmmmm!
It seems to me that they just wanted to start getting paid on the account. Unfortunately, I am still unemployed and just barely getting by, and am not going to be able to make the payment to them. I was hoping that I would be able to find a job and be able to start paying them back, but now they are forcing the issue and I am looking at filing for bankruptcy. I think that most people think that all the people filing for bankruptcy on the credit card companies is going to eventually hurt the companies. It really doesn’t hurt the credit card companies if you file bankruptcy on them, because all they do is write it off as a bad debt and it comes right off the top on their taxes. It only hurts you and your credit, which in turn, if a company wants to hire me and does credit checks, they won’t hire me because of the bankruptcy. So the credit card companies win and you lose any way you look at it.
I hope this experience helps you in making the decision as to whether you get the coverage or not.
By SJM on Sep 7, 2009
Wow, after reading all the comments I decided to say no to the credit card protection, this is my fist time I have a credit card VISA and I recieved a call from the bank that issued it saying that I should get a protection credit card and give me only a month to review it, but after all your comments definetively I will say NO THANKS!!!
Thank you guys for sharing your experiences, I wish none of these things happend to you.
I always have the habit to pay everything at once and I do not like to make payments, only cash or right away.
The reason why I applied for a credit card is to have credit to buy a house in the future that saddly is what you need here in Canada.
Well, we learn something every day, thank you again for your comments.
By John Adams on Sep 16, 2009
Ye, well I’m one of those who took out the credit card protection and boy was I hit.I got laid off last year and I had 4 cards with this protecton and I do admit 2 of them paid off but the other 2 sears and Walmarts hasn’t. What a big rip. First I applied for my unemployment benifts under this, and they denied me because I work for my mother 10 hrs a week so there for I havent suffered a comlete job loss. When you consider 350 to 400 a week down to 70 a week is that not 90% job loss. Then I became very ill and applied for social security disablity on the doctors orders and they still turned me down because I had to be working a least 30 hours a week before I became ill and couldn’t work. I tried to plan for things like this and I don’t wont to say I am stupid because I’m not, But they are so smooth that I really think there ought to be a law against what these people do. especially when you are keeping up your debt until something bad goes wrong then they should stand by you as long as you are paying for this protection. But there is a lot of evil in this world and this is one of them.
By Pat on Oct 7, 2009