Expensive and may let you down when you need it.
Your credit card company forcefully pitches them at every opportunity. But are payment protection plans worth the money? For nearly every situation, the answer is an emphatic "No."
If you lose your job, payment protection puts your credit card balance on hold for up to two years- no payments and no interest. Most credit protection plans pay off your credit card balance if you die.
It sounds nice until you consider the cost: Effectively a 10.5% increase in your interest rate (or more) until the benefits kick in.
Credit card companies have a laundry list of reasons to deny your claim. They outright refuse to give you the fine print until you sign up.
Payment protection plans are extremely profitable for credit card companies. This means the opposite for you, the consumer. Unless you can turn the odds in your favor, you should walk away from this bet.
What is payment protection exactly? Is it right for you? Do you qualify for the benefits? What will it cost you?
Find all of this and more in Knowzy's "Credit Card Payment Protection Plans: A Closer Look."
Credit card companies offer payment protection plans (sometimes called "credit protection") to help you out in times of financial trouble.
They "freeze" your credit cards in time for up to two years: No payments, no interest and no payment protection charges.
Some plans also pay off your balance if you die (in states where it's legal).
You are charged a monthly fee for payment protection based on your credit card balance. The fee is typically equivalent to a 10.5% rise in your interest rate. That's about $45 per month for a $5,000 balance.
Here are the two main features of payment protection in more detail:
While enrolled in payment protection, you won't have to pay your credit card bill under certain circumstances (see list below) for a period of time.
On most plans, this means you won't have to pay your credit card bill and the credit card company puts interest and payment protection fees on hold. When your benefits run out, your credit card balance is the same as when you started.
CapitalOne's payment protection plan is unique: It actually pays your full minimum monthly payment, meaning your balance decreases a little each month.
On a few plans, you cannot use your card while receiving payment protection benefits. Discover's plan gives you a $1,500 credit limit with their approval. Most credit protection plans allow you to keep spending. The policy for each plan is listed in our comparison chart.
"Qualifying events" vary from company to company. Each event requires proof that you qualify and contains reasons for denying your claim. Failing to read the fine print can cost you big!
Here are the most common qualifying events:
These benefits last as little as one month and as long as two years. The length of time depends on the qualifying event and the company offering the plan.
Perhaps the most compelling reason to sign up for payment protection is when you're certain you're going to die soon.
The "debt cancellation" feature wipes out your entire credit card balance (up to $25,000).
If you qualify, life insurance is more flexible and usually much cheaper. $25,000 in payment protection costs around $220 per month. $50,000 in life insurance for a 54-year-old smoking male is around $75 per month. Double the payout for less than half the price and your heirs can spend it on anything, not just credit card debt.
Finally, beware: At least nine states consider debt cancellation a life insurance policy. It is illegal for credit card companies to offer this benefit if you live in one of these states. The company is required to notify you if that is the case but the best policy is to ask first.
Credit card companies can deny your benefits for a number of reasons. It's important to read the fine print carefully to ensure you are not wasting your money.
Although, they refuse to give you the fine print until you sign up, Knowzy is making the full legal terms and conditions available online.
Below are a number of reasons credit card companies may deny your claim:
For the vast majority of Americans payment protection is simply a waste of money. There are, however, a few situations when you might come out ahead with a payment protection plan.
It's important that you consider your situation carefully against these scenarios. Credit card companies can deny your claim for many reasons. The plans are so expensive that staying on them too long is usually a money-losing proposition.
The following scenarios may lead to a positive payment protection experience:
The biggest payout from these plans occurs upon your death: Payment protection plans cancel your entire credit card balance (up to $25,000, see chart). "Debt cancellation" is the technical name for this benefit.
You have our condolences if your situation fits Reason #1. But before you run out and sign up for payment protection, consider these points:
Before you buy payment protection for debt cancellation, get a quote for life insurance in the same amount or more. If you qualify for it, life insurance is usually much cheaper and your heirs can spend it on more than just your credit card debt.
Credit card companies can't sell debt cancellation plans in states that consider it life insurance. Regulations would force them to make these plans more generous if they sold debt cancellation as insurance.
If you live in AK, IA, MT, NV, OR, RI, TN, WA or WI (and possibly more states), credit card companies can't legally offer debt cancellation in its current form.Before signing up, be sure to ask if you are in a state that prohibits the credit card company from offering debt cancellation upon your death. Credit card companies are happy to sign you up for payment protection, at the same price, even when state law prohibits them from offering what you're really looking for.
If you sign up, run up a bunch of charges and die soon after, they may not cover you after all. Discover reserves the right to deny or revoke your balance cancellation if they "discover extraordinary use of your account prior to your death."
The maximum benefit on many plans is $25,000. If you actually had a $25,000 balance, you would be paying $222.50 per month on the average plan.
The monthly bill for payment protection shows up as a charge on your credit card. If exceed your credit limit or make a late payment, you may lose your coverage.
Make sure paying for payment protection doesn't prevent you from using it when you really need it.
See how much it will cost you with our payment protection fee calculator.
This is a tricky call at best. It only makes sense if the job loss is coming in the next few months and you are certain your credit card company won't deny your claim.
Josh Smith at WalletPop claimed payment protection might be a good hedge against an upcoming layoff. Commenters on his article universally disagreed, recounting horror stories of paying for payment protection only to be denied when they filed a claim.
On one hand, if you don't think you can make your minimum monthly payments when you lose your job, payment protection can keep you out of trouble and free up some cash when you need it most.
On the other hand, you will pay dearly while you're waiting to lose your job- money you could set aside for future minimum monthly payments or use to pay down your balance.
Here are some points to consider:
You may have other ways of keeping up with your minimum monthly payment when you lose your job. First, you'll likely receive unemployment checks (if you don't qualify for unemployment, you typically don't qualify for payment protection benefits anyway). Your employer may offer a severance package. You may collect unused vacation time. There's no need to pay for payment protection if you can get by without it.
As a rule of thumb, three payment protection fees equal one minimum monthly payment (find the precise ratio for your situation with our calculator). Your interest rate effectively goes up 10.5% or more while you're paying for payment protection.
Is handing over all this money to the credit card companies month after month really going to benefit you when the layoff finally happens? What happens when you return to the workforce?
Unless you're certain the layoff is coming in the next few months, you're probably better off waiting until you have a more solid timeline. If you expect to return to the workforce within a few months of your layoff, you might be better off putting aside a few months of credit card payments.
Check the rules of the payment protection plan you're considering: Some prohibit or limit the use of your credit card while the plan is active. If you're counting on that line of credit when you're unemployed, payment protection isn't for you.
If you miss payments or exceed your credit limit, your payment protection plan could be suspended. All that money you paid waiting for the layoff will be for nothing when you finally need it.
Your payment protection fees could be the very charges that put you over your credit limit.
You will likely need to make at least one payment after you lose your job. Most plans require at least 30 days of unemployment before you can claim your benefits (15 days for Discover).
Make sure you are not at risk of getting behind on your payments or going over your credit limit before you decide to sign up for payment protection.
After all the money you spent, all the faith you put in the payment protection plan, the credit card company may tell you, "Sorry, you don't qualify." Don't let this happen to you. See what might disqualify you in our "Reasons Your Claim Might Be Denied" section and read the terms and conditions of your plan carefully.
Some plans offer benefits for so-called "life events." You have the advantage in these situations because you can predict when you are going to file the claim.
In this strategy, you can sign up for payment protection just before one of the events below, put your balance on hold and cancel the plan just after you stop receiving benefits. The goal is to make no more than two protection plan payments.
Life events are usually short-term benefits, from one to four months. Not all payment protection plans cover all of the benefits below. Review your plan carefully to make sure your life event is covered.
Be prepared to prove you that you qualify for the benefits. The credit card company requires a note from your employer, a legal document or other evidence in order to qualify. The terms and conditions spell out what you will need to provide.
The events include:
We know that credit card payment protection plans are expensive and the credit card companies keep most of the fees they collect. Here we break down these numbers and provide a calculator to show exactly how much payment protection would cost you.
Credit card companies typically charge $0.89 per month for every $100 in balance you are carrying. On a $5,000 balance, that's $44.50 per month or $534 per year.
The fees show up as a charge on your credit card, so it's easy to lose sight of just how much payment protection costs.
Don't forget the "hidden" surcharge: Payment protection fees accumulate interest if not paid off immediately. $534 works out to an additional $106.80 per year at a 20% interest rate.
Does it make sense to pay $45 per month to avoid making a minimum monthly payment of roughly $135 at some point in the future? The math speaks for itself: Unless it's the very near future, probably not.
This handy calculator makes it easy to figure you how much payment protection would cost you. Just put in your balance, the amount your credit card company charges per $100 and it does the rest.
See our comparison chart if you are unsure how much payment protection costs through your credit card company.
We've compiled a list of the payment protection plans offered by US credit card companies.
You'll find more than just the cost. Also included are the important terms, how long coverage lasts and a link to the complete terms and conditions, where available.
We have not found all of the programs. Please let us know of any that we missed.
1 Plus an additional $3.29 per month for a mandatory "add-on" which includes a credit monitoring service and LifeWorks, a service offering referrals and advice on a wide range of topics, including improving your computer skills, parenting, estate planning and going back to school. This add-on is not optional.
Cost per $100 You pay for payment protection monthly based on every $100 in credit card debt you are carrying. For example, if a credit card company charges $0.89 per $100 and you have a $1,000 balance, you would owe $8.90 for the month. Use our credit protection calculator to determine exactly what your monthly payment protection fee would be if you signed up.
Pay or Suspend "Pay" is better than "suspend." Pay is also rare. In both cases, you don't need to make your minimum monthly payment. "Pay" means the payment protection plan pays your credit card's minimum monthly payment, covering interest and a small amount of principal. "Suspend" means your interest charge is waived and your monthly payment is deferred. Unlike "pay," suspension doesn't pay down your balance.
Days Before Claim The number of days before you can collect benefits if you become unemployed. For example, on Bank of America's plan, if you sign up for credit protection and lose your job 14 days later, your involuntary unemployment benefits won't kick in for another 46 days.
Days Unemployed The number of days you need to be out of work before you can file an involuntary unemployment claim. On most plans, you can't activate credit protection the same day you lose your job- you need to be out of work for a full 30 days.
Maximum Term (Months) The total number of months you can claim unemployment or permanent disability benefits. At some point, you are cut off from payment protection benefits, after which you need to start making your minimum monthly payments or face the consequences.
Use Card? "Yes" means you can continue using your card while receiving payment protection benefits.
Maximum Death Benefit The "debt cancellation" feature of payment protection pays off your credit card balance if you die up to the amount listed in this column.
Web Page Click the "Go" link to visit the marketing or sign up page for the payment protection plan.
Terms and Conditions The complete "fine print" for the payment protection plan. The "Word Doc" link contains the photo-scanned copy of the terms and conditions. It is quite a large file and requires Microsoft Word or a program that can read Word documents. The "Text" link has only the text of the terms and conditions. It may contain errors and the formatting may be a little odd.
Figures last verified September 1, 2009
Among the most astonishing things Knowzy discovered: Credit card companies will not give you the "fine print" until after you are enrolled in payment protection. Worry not, though, we've obtained them and are reprinting them below.
Can you imagine: You are accepting a legally binding contract but they will not show the contract you are agreeing to? This is clearly a "red flag."
Knowzy contacted Chase, CapitalOne, Discover and Bank of America requesting the terms and conditions for their respective payment protection plans. After spending over two hours on the phone, pressing the reps and their supervisors for the legal terms of the contract, none would agree to provide it prior to signing up.
The banks claim you have a 30-day "review period," where you can read the terms. If you don't agree to them, cancel in the first 30 days and they will refund any charges.
However, the charges appear on your next statement closing date, which is almost certainly less than 30 days. You will incur interest on this charge if you are carrying a balance. Both Chase and CapitalOne acknowledge the interest charge may be non-refundable, even if you get a refund for the payment protection charge.
To top it off: The 30 day period begins when you call but it took 7 to 11 days to receive the materials from the banks Knowzy signed up with. The review period, it turns out, is actually much shorter than 30 days.
Can you trust a company that flat out refuses to disclose important details that could cost you a great deal of money?
Since the credit card companies will not give you the details you need to make an informed decision, Knowzy is doing it for them. Here are the complete payment protection terms and conditions from the major credit card companies:
Payment protection is nearly identical in function to a similar product, credit insurance. The big differences:
Credit card companies used to offer credit insurance to their customers through insurance companies. Consumer groups generally considered these insurance policies a poor value. In 1990, for example, the Consumer Federation of America called credit life insurance the "nation's worst insurance rip-off."
Around 2001, insuring your credit card debt got even worse.
Credit card companies concocted a scheme to offer their own product- Payment Protection. They can charge even more money, cut out the insurance company middleman and not worry about those pesky insurance regulations.
The Center for Economic Justice (CEJ), a non-profit consumer advocacy organization, prepared a detailed comparison between credit insurance and payment protection in July 2003. Here are some of the findings:
Do you have an experience with credit protection you'd like to share? Has payment protection helped you? Has it let you down?
Share you payment protection stories on our Credit Card Feedback page.
If you have questions about payment protection plans, please let us know. When we find an answer, we share it with you and future visitors wondering the same thing.
Originally Published: Wednesday, September 2, 2009, 5:00 PM PT
Last Updated: Tuesday, August 30, 2011, 5:21 PM PT
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