Should I Do A Payment Protection Plan?

Should I Do A Payment Protection Plan?Do you know what payment protection for credit cards is? Up until a few days ago, I didn’t have a clue. It wasn’t until a friend of mine was offered this service and asked me if he should take it that I decided to find out what it was. I asked him for more information and he sent me his offer.

The offer said that if he signed up for payment protection and in the future became unemployed, hospitalized, or disabled, he could suspend his payments and interest accrual for two years. A balance of up to $25,000 could even be canceled if he were to pass away. Suspend credit card payments if you lose your job? Yes, please! Or at least, that was my first thought. But before I replied to him I wanted to know more. Why would a credit card company offer something like that anyway? Time to read the fine print.

Payment Protection Plan: The Case For It

It’s easy to understand why someone would be persuaded to purchase payment protection, also sometimes known as credit insurance or credit protection. We’re all up against a tough economy and job market and even the best of health could change at any time. Plans like this are counting on that fear and offer what seems like an easy solution in case we should become unemployed or disabled. Sure, they cost money but the peace of mind is worth it, right?

Payment Protection Plan: The Case Against It

Peace of mind is extremely tempting, but that doesn’t mean it can be counted on should you fall on hard times. Here are a list of the reasons they may not be worth it.

  • High Cost
    Payment protection doesn’t come cheap. (See this Bankrate article for a breakdown of costs per some of the major banks.) On average, credit card companies charge just under $1 or more per $100 balance. Sure, maybe that doesn’t sound like a lot, but it adds up. If you are not carrying much of a balance then perhaps this is marginal – although if you’re not carrying a high balance then there’s no need to protect for payments. If you are carrying a high balance, then the fees could end up costing more than you’d ever receive in benefits. Fox Business explained this in further detail: “If you’re paying $1 per $100 of debt, that’s equivalent to adding 12% a year to your annual interest rate. On a $2,000 balance, that’s $240 a year for the plan, plus whatever you pay in interest. Because most plans cover only your minimum payment, you could end up paying out close to the maximum you’ll ever receive.”
  • Too Many Exceptions
    Maybe you read this and think cost is not an issue. You will still have to read the fine print. It turns out that most people who try to receive the benefits of this plan never do because of the amount of exceptions the credit card companies list. What kind of exceptions can disqualify you from receiving the benefits you’ve already paid for? Involuntary unemployment and length of unemployment are two just to start. So before you sign on the dotted line, think about the reasons you may need this service some day and then read the fine print to make sure you’ll be covered if you need it. If the company won’t send you written information (which many won’t do until after you’ve signed up) then don’t even bother. No legitimate program wouldn’t at the very least give disclosure information before you sign up.
  • You Will Have to Fight For Benefits
    Let’s say you’ve paid for this service and are able to qualify for it when in need. Be prepared for a long, drawn-out battle anyway. The same Fox Business article mentioned above quotes statements made in a lawsuit against multiple credit card companies, “‘Payment Protection is so confusing as to when coverage is triggered, so restricted in terms of the benefits it provides to subscribers, and processing claims is made so difficult by Defendants, that it is essentially worthless,’ states the lawsuit.”

All in all, payment protection plans are so notorious for being expensive and unavailable when needed that some credit card companies are even stopping these offers. In an article recently published by Time, allegations of dishonest practices were brought to light. “Last month, Capital One was hit with a $210 million penalty for engaging in sneaky marketing practices, including pressuring customers to sign on to pricey services of dubious value such as credit monitoring and ‘payment protection.’ In the aftermath of the fine, several big credit card issuers have backed off of payment protection plans for new customers. As for cardholders who already signed up for this sketchy benefit? Many will keep getting charged until they call up and cancel the service.”

Payment Protection Plan:  What Are the Other Options?

Let’s say you’ve weighed all of these cons and you still think you need payment protection. Perhaps your health is unreliable or you work in a field that fluctuates greatly. There may be other options that you can use to protect yourself that will cost you less and provide better protection:

  • Emergency Fund
    Chances are, if you can afford to lose even a few dollars per month to the payment protection fee, then you may be better off placing that money into a savings account specifically for an emergency fund. That way you can know that all the money is yours and not going to potentially useless fees and you have total control over it at any time. Saving even a little bit each month can have a big impact after a year and developing this habit may help you find yourself in a better financial place than you were in before you considered payment protection.
  • Insurance
    There are multiple types of insurance that can potentially help you pay your bills should you fall on hard times. Most commonly, life insurance, disability insurance, and unemployment insurance are tools that you can use in your time of need. Check your policies to see if they cover your credit cards and other bills. If they do, then there’s no need to pay extra for payment protection.
  • Negotiate with Creditors
    This is the option that many people skip simply because it can be so frustrating to call a credit card company. However, if you are in need of lower interest rates or a payment plan, be prepared to make that call. It is widely recommended that you notify your creditors and try to negotiate for lower rates or even a payment plan. They are more likely to work with you if you are upfront and honest about your situation – it is better for them to work something out than take the chance of your debt going off to collections or getting discharged through bankruptcy.

While the desire to sign up for payment protection is understandable, the reality is that these plans often tout promises they can’t or won’t keep. In fact, the majority of the people who sign up and need the payment protection the most are the least likely to benefit from it. Bankrate quotes Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling: “’However, the people who need payment protection the most are those who can afford it the least, Cunningham says. “You could be paying hundreds of dollars a year on a plan that, hopefully, you may not even use. There’s no guarantee that you’ll qualify, and if you do, you may have to jump through hoops for the company to honor its plan.'”

What does this mean for you? If you are absolutely certain that you need a payment protection, be sure to weigh the costs and other options before you move forward.

Image credit: Ed Yourdon

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  • This sounds very similar to the extended warranty purchases that car and appliance dealers try to rope you into. I think you hit the nail on the head when you said that you should be putting that money into an emergency fund. Really, if you don’t have one of those, you shouldn’t be spending money on credit cards to begin with.

    • Shannon_ReadyForZero

      I didn’t think of the similarity to warranties but that’s definitely an interesting point. At the end of the day, I think many people try to sell services based off of fear but running the numbers allows you to see if they are truly worth it in the long run. Unfortunately, many people can get into credit card debt because they don’t have an emergency fund and they rely on credit cards to get them through hard times. I was guilty of this right after college and now I understand that it’s better to do whatever you can to build an emergency fund in order to avoid the slippery credit card slope.

      • True. If you are already in debt it is hard to build any sort of funds….which is why, I suppose, you’d be tempted to purchase the product in the first place.

        • Shannon_ReadyForZero

          You’re absolutely right Greg.