Wednesday, April 20, 2011

Credit card protection: Is it worth it?

Credit cardsImage via WikipediaAre you paying a fee every month for credit card payment protection? It may not be worth it or you could be over paying. Americans are still carrying large credit card debt and they fear if they lose their job or become ill then they won't be able to make their minimum payment. The credit card company will make your minimum payment in these times, for a small monthly fee.

But a new government report shows that the price consumers pay for this debt protection may be too much for the benefits they receive. The Government Accountability Office reports that consumers shelled out about $2.4 billion in 2009 to the nine largest credit card issuers for debt protection products. For every $1 cardholders paid in fees, they received 21 cents of benefits. Meanwhile, the card issuers earned 55 cents, before taxes, on every dollar of fees.

Debt protection products generally promise to suspend monthly minimum payments or cancel balances in the event of an illness, unemployment or the death of the cardholder. Fees are tied to the account balance and can amount to hundreds of dollars a year. At that price, consumers likely are better off paying down their balance or putting the money in an interest-bearing account that can be tapped in an emergency.

Monthly fees, according to the GAO, range from 85 cents to $1.35 for every $100 of debt. On a $5,000 balance, consumers could end up paying $510 to $810 a year.
The irony is that those with high card balances are more likely to be struggling financially. Usually, the people who can afford the least will pay the most.

Credit insurance and debt protection products can safeguard credit ratings when consumers go through tough times, and consumers have lodged few complaints, the GAO notes. Moreover, 70 percent of benefit claims were paid in 2009, according to the GAO study. However, nearly one in four claims were denied, often because consumers didn't provide documentation of their hardship.

Instead of buying debt protection. If you lose a job or suffer some other financial hardship, contact the card company to work out a payment plan.

Some consumers might be tempted to buy debt protection because they worry about dying and leaving loved ones stuck with their credit card debt. But survivors won't be held accountable for the debt unless their names are on the account. If people are worried about leaving behind bills, they should buy life insurance that will cover more than just a credit card debt.

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