The fine print in credit card insurance isn't so fine
Filed under: Credit Cards
If you have any credit cards or have had some in the past, it's almost inevitable that you've been asked if you'd like to sign up for debt cancellation or credit card insurance. The pitch sounds like a pretty good idea at first, usually going something like this: If you lose your job or the ability to pay your debts, your debt cancellation service will pick up your credit card tab and make your payments for you.
Obviously, you'll have to decide for yourself it that's a good idea or not. But if you want an opinion, I think it's a terrible waste of your money. I think you'd almost be better off burning your cash in a fireplace, because at least you'll get something out of it (warmth and it's always fun to watch the flames in a fireplace). Still, it's nice to have a second and even third opinion, so I spoke to two financial and credit experts, and they, too, didn't exactly have a ringing endorsement for debt cancellation or credit card insurance.
Here's why.
It's probably more expensive than you think. It sounds cheap - you're going to pay maybe $0.75 to $2 per $100 of your debt -- to ensure that your bills are paid in the wake of something bad happening, and everybody's afraid of something bad happening these days. Still, let's say you are carrying $7,000 on a credit card. I'm no math whiz, but $100 goes into $7,000 seventy times, so 75 cents times 70 means you're going to pay around $52 a month for credit card insurance -- and that's only the low end. Pick a policy where you have to pay $2 a month for each $110 of credit you carry, and you'll get charged $140 on that $7,000.
It's probably more expensive than you think. It sounds cheap - you're going to pay maybe $0.75 to $2 per $100 of your debt -- to ensure that your bills are paid in the wake of something bad happening, and everybody's afraid of something bad happening these days. Still, let's say you are carrying $7,000 on a credit card. I'm no math whiz, but $100 goes into $7,000 seventy times, so 75 cents times 70 means you're going to pay around $52 a month for credit card insurance -- and that's only the low end. Pick a policy where you have to pay $2 a month for each $110 of credit you carry, and you'll get charged $140 on that $7,000.
But what's really insidious is that these monthly insurance payments aren't tacked onto your monthly minimum payment, says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. "It's being tacked onto your balance. So you might be paying a $200 monthly minimum payment, and then $100 in credit card insurance is being added on the back, so the balance is going to grow, which means it'll take longer to pay off your debt. You really are going backwards."
Cunningham adds that if you were to pay for debt cancellation or credit card insurance on multiple credit cards, "then that's really going to add up."
They're just paying the minimum payments. Let's make this very clear -- your debt is not about to be canceled, despite some companies calling credit card insurance, debt cancellation. "Ultimately, you're still responsible for your debt," says Avi Karnani, co-founder of Thrive.com and the head of strategic innovation at LendingTree.com. Karnani fears some customers with massive debt might think that credit card insurance is like winning the lottery: That if you lose your job, all your debts will be erased -- well, canceled, like the phrase "debt cancellation" would suggest. He imagines some people are probably thinking, "Hey, let me get one of those things."
It may be harder to get those payments paid than you think. "These policies are hard to collect on," says Cunningham. "The burden of proof always [falls on} the consumer.
Karnani agrees, saying that credit card insurance is a little like going on disability. "They're going to verify that you don't have a job."
Which you would expect, of course, but Cunningham adds, "There are a lot of hoops you have to jump through, and often times you won't qualify if you land a part-time job. Suddenly, you're not 100% unemployed, and your claim may be denied."
The Red Tape Chronicles, an online publication on MSNBC.com, recently did a masterful job portraying the seedy side of debt cancellation and credit card insurance. They noted that in 2003, the Center for Economic Justice estimated that consumers paid $2.5 billion for programs like credit card insurance, but card firms only paid $125 million in benefits. That may prove little -- not everyone who signs up for these programs will have trouble making the payments -- but it does show that it's a cash cow for the credit card industry and not its customers. And certainly there's no shortage of complaints on the blogosphere about debt cancellation services.
"When I was injured at work, I had insurance on everything," complained one woman on the money blog SmartSpending. "Only two credit card insurance companies out of eight paid. It is a never ending battle of paperwork to prove your disability every 30 to 60 days depending on the company. Your credit cards go unpaid, your credit gets ruined, but of course, it's our fault - not the credit card company, not the insurance company. (Customers are expected to know the fine print, even though the companies do everything in their power to conceal it.)"
Debt cancellation, or credit card insurance, really protects the credit card companies, not you. If you think about it, this is an insurance policy that the credit card companies are taking out against you, only you're the one paying for it, not them. The credit card companies don't want you to default on what you owe them, so they're asking you to pay them $52 or more a month. Then if you lose your job or a medical emergency sidelines you and you can't make the payments, there's less of a chance you'll default on your loans if they take over for awhile -- using money that you've given them. But, as mentioned previously, there's absolutely no guarantee that you'll necessarily get everything paid off, or in a timely manner.
Speaking of protection, that Red Tape Chronicles article makes it very clear: If you're signing up for a credit card, make sure you're the one filling out the application and not a clerk or a telemarketer. Sometimes, eager to land a commission, they'll sign you right up for the debt cancellation service without necessarily getting your permission.
If you really want to protect yourself, then calculate how much credit card insurance would cost you and put the same amount of money in a savings account. Then, if something bad does happen, you have a nest egg to protect yourself and, if you want to, use it to continue paying off your credit card debt. Or you could calculate how much the credit card insurance would cost you and, instead of putting the money in a savings account, add it to your monthly credit card payment and bring your total down that much faster.
Cunningham also points out that you may well be insured, anyway. If you have disability insurance, depending on the type of insurance you have, that may cover your minimum credit card payments. Or if you have life insurance, the whole idea there is that your loved ones get a ton of money so they can pay off debts. It's a nice idea, this credit card insurance concept, but only for the credit card industry.
Geoff Williams is a frequent contributor to WalletPop and AOL Small Business. He is also the co-author of the upcoming book, Living Well with Bad Credit.
Reader Comments (Page 1 of 1)
11-25-2009 @ 12:41PM
Highest CD Rates said...
I agree with you. Banks and credit card companies try to capture us and be fool us. The minute we go for any credit card these insurance companies starts with there promotions and offers. There hidden clauses are too dangerous and ultimately loss of money for us.
Highest CD Rates
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11-24-2009 @ 1:41PM
wdmurphy said...
I have found after reading the fine print on offers by credit card companies everything they offer us is a bad deal for the consumer. i repeat EVERYTHING IS A BAD DEAL FOR THE CONSUMER. Furthermore when the new laws take effect nothing is going to change. Pay off your cards AND PUT THE LOAN SHARKS OUT OF BUSINESS. Remember the public servants who are supposed to be protecting you are doing nothing but lying to you about the changes coming.
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11-27-2009 @ 10:03PM
BEWARE OF THE THIEVES ! said...
FICO SCORE 800+ . NEVER LATE ! INTEREST RATE JUST WENT UP TO 29.90 % THESE THIEVES ARE OUT OF MY LIFE ! IF I CANT AFFORD IT, THEN I DONT WANT IT ! LATER BANK OF DUHHHMERICA, ENJOY YOUR STOLEN MONEY, ALONG WITH THE FREE 100 BILLION PLUS... HOW DO YOU SLEEP AT NIGHT WITH YOUR STOLEN CASH ? OH I SEE, YOU HAVE ZERO CONSCIENCE. EITHER WAY YOUR A BUNCH OF THIEVES.
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11-27-2009 @ 10:36PM
Jennifer said...
This article didn't mention that if you ACTUALLY get them to make payments for you the IRS considers it "income" and you will have to pay TAXES on the amount received!! This happened to a friend of mine and blew us away. We have really been sold a bill of goods by credit card companies and their predatory practices. A lot of us were given cards "right out of college" and are now treated like criminals for having used them!! Oh, and a friend of mine used a "transfer balance check recently"....they sent her one and she was surprised...thought they were relics......THEY then REDUCED her credit line because she USED IT!! She also has an 800+ FICO. We are on our own America!!
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11-28-2009 @ 12:01AM
sluggo said...
use a credit card and you become a slave to the banks and they admit it.
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11-28-2009 @ 12:12AM
Kris Marshall said...
Watch out for the claim that you are protected from lost or stolen card charges as well. I have to hire an attorney to fight CapitalOne because they refuse to honor that guarntee on losses of $5000. The card was stolen by a person I had just met on a first date. Turns out I was given false name, address,etc. Cap One says since I invited the person into my home, that I am responsible. This after over a month of police investigations, subpoenas, line ups etc failed to locate the thief. Ironically, if I had lied and said it fell out of my pocket on the sidewalk, it would have been covered. So much for honesty.
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11-28-2009 @ 11:14AM
bev said...
I can tell you first hand because I use to work for a major credit card company that these insurances like payment protection are useless and could hurt you in the long run. I had seen many times people out of work that had payment protection and the protection wouldn't kick in for sometimes 6 months and their credit was already hurt because of it. It also goes by your balance and some people would end up paying a few hundred a month if they had to use it. The protection sum would be applied to their bill and send them over the limit giving them an over limit fee. OMG the stories I could tell you. Never ever get this.
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1-09-2010 @ 12:17AM
SUSAN said...
AFTER READING EVERYONE ELSES' REPLIES...I GUESS IM THE ONLY ONE THAT HAS HAD A SOMEWHAT POSITIVE RESPONS WITH MY CREDIT CARD INSURANCE PROTECTION. CAPITAL ONE WAS THE FASTEST TO PROTECT WITH ONLY A FOUR MINUTE CONVERSATION OVER THE PHONE AND THE NAME AND PHONE NUMBER OF THE UNEMPLOYMENT OFFICE. BEALLS, KOHLS AND WALMART PAID OFF THE ENTIRE BALANCE (EXCEPT FOR ANYTHING I MAY HAVE CHARGED AFTER REPORTING BEING UNEMPLOYED) THE REST OF THEM DO JUST PAY THE MINIMUM BUT THEY ALSO PAY THEIR OWN INSURANCE PREMIUM SO ITS NOT ADDED TO MY BALANCE....NOW IVE GONE FROM UNEMPLOYMENT TO TOTAL DISABILITY AND ALL MY CARDS WILL PAY OFF EVERYTHING BUT CHARGES I MAKE AFTER THE INITIAL CLAIM. OH--DID I MENTION--BEALLS, KOHLS AND WALMART---I CAN ACTUALLY USE THOSE CARDS SHOULD I CHOOSE TO EVEN AFTER THEY JUST PAID THEM OFF....HOPE IVE GIVEN SOME PEOPLE SOME POSITIVE THOUGHTS ABOUT CREDIT CARD INSURANCE--AS FOR MYSELF---I THANKED GOD MANY TIMES OVER---AND YES....I DO HAVE TO UPDATE ON MY UNEMPLOYMENT STATUS EVERY 90 DAYS....TAKE CARE ALL AND GOOD LUCK TO ALL OF YOU....SUSAN
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