How many of you have called a credit card company only to have either an automated message or an agent try to sell you credit card protection insurance? Calling the product “payment protection,” a credit “shield,” or some kind of “safeguard,” the company launches into its schpiel. It goes something like this:
“Sir, for just pennies a day, did you know that you can have peace of mind in the event of unemployment or disability? With our Credit Plus Protection Program, we’ll make your minimum payments for you in the event of a qualifying life change…..”
“Would you like us to enroll you in a FREE 60-day trial of our Payment Shield Plan? You can try it for two months and cancel at any time with no charge to you. This service will protect your credit in case you encounter unforeseen financial difficulties…..”
Whatever an issuing bank calls their credit card protection insurance, this type of coverage is almost universally a poor investment – a bad idea that exploits consumers in the name of protecting them. Let’s unpack it:
Credit Card Protection Insurance: What does it actually cover?
As you can gather from the example pitches above, these programs appeal to consumer fears about future inability to make payments due to unplanned problems – medical emergencies, disability, unemployment, etc. They offer to “make your minimum payments for you” (or suspend them) for a period of time – usually 6 months, 12 months, or 24 months. But the fine print may exclude a variety of situations. A pre-existing medical condition, for example, might bar you from a claim. Or a particular kind of illness could be excluded. Or you may not be covered if you are terminated from a job instead of laid off. So the safeguards probably aren’t as strong as you’d hope.
Credit Card Protection Insurance: What does it really cost?
Though some issuers state a flat annual, quarterly, or monthly rate, the vast majority of credit card companies tend to express the cost in terms of pennies so that it sounds nominal. They may quote you a cost of 79 cents for every $100 you owe (a common rate for credit card protection insurance). But imagine your balance goes up to $2500, even just for a month after some big purchases. The copper pennies quickly become crisp dollars. At 79 cents per every $100, you are paying $19.75 for just one month of this coverage on a $2500 balance. That’s almost $20 that you could be using to pay down the debt, saving yourself money in the long run.
Even if you only keep an average balance of $500 (far lower than what most Americans keep), over the course of one year, the insurance would cost you about $47. Nearly fifty dollars for something you probably won’t need – and worse yet, something you probably can’t use even if you DO need it?
Credit Card Protection Insurance: The Free Trial
There is usually a trial phase tacked onto the front end: try it free for 30 days, 60 days, or maybe even 90 days. They’re figuring you will agree for now and then forget to cancel it before the trial expires. Then, when the charge finally appears, you might not notice it on the statement, might not recognize it, or
might not take the time to call and cancel – especially if the fee appears nominal at first, while your balance is low or at zero. By the time your balance creeps up, the credit card company is beginning to cash in on your forgetfulness, your fear, or your naivete.
Credit Card Protection Insurance: When will they try to sign you up?
The short answer is: anytime they can. Sometimes, the difference between agreeing to credit card protection insurance is the difference between hitting “1” or “2” on your phone while activating a new card or while waiting in queue for a different customer service inquiry. Be alert whenever you call the company, and review your statements with scrutiny. There’s often nothing to sign, so some unsavvy consumers can end up getting the coverage without even trying.
Credit Card Protection Insurance: Final Thoughts
While playing on the fears of hardworking people who are concerned about their credit card payments, greedy companies aren’t even exploiting everyone equally. They’re targeting less sophisticated consumers who may not understand the so-called protection and why it’s a bad investment. They’re also targeting people who they know will end up carrying large balances – usually people whose situations are precarious enough to begin with. Leave it to corporations to screw people out of money by aiming for the little guy in every devious way they can.