Credit cards can provide you with a convenient way to pay for your purchases. However, if you rack up a balance, things could start to get dicey. Not only do you have to contend with interest charges, but you also have to worry about what happens in a financial emergency if you can no longer make your credit card payments as agreed.
When you are in this frame of mind, it can become tempting to agree to credit card insurance. These plans, sometimes called “payment protection plans,” are supposed to help you make your credit card payments if you become unable to do so as a result of some financial catastrophe, like a job loss.
Before you decide to get credit card insurance, make sure that you understand the terms; you might find that it’s not worth it.
How Credit Card Insurance Works
In most cases, credit card insurance is charged based on your carried balance. It’s common to see plans that charge $0.89 per $100. So, if your credit card has a balance of $1,800, you will be charged $16.02 for that month. In many cases, the insurance charge is added to your credit card account balance. Since it becomes part of your balance, you will likely also pay interest on your premium to boot.
The advantage is that, since the premium for your payment protection plan is based on your balance, the cost drops as you pay down your debt. If you don’t carry a balance on your card, you won’t have to pay the premium; you get the protection for free.
When you run into a financial problem – and you can’t make your payments – you would let your credit card issuer know, and the issuer makes payments on your behalf. Most of these plans won’t forgive your entire balance. Instead, minimum payments will be made for you, until you can afford to make payments on your own – or until a certain amount of time has passed.
Payment Protection and the Fine Print
Of course, whenever you deal with insurance or credit cards, there is fine print. Credit card insurance is no exception. You need to make sure you understand what, exactly, is covered when it comes to your credit card policy.
First of all, you might run into restrictions. If your credit card account is a joint account, and the other account holder still has a job, you might not qualify for the insurance payouts. Additionally, there might be other restrictions, such as you have to be jobless for a certain period of time before the payments kick in, or you might be required to show some other type of hardship.
Another consideration is how long you will receive benefits. Most of these policies have limits on how long you can receive benefits. You might only be able to receive benefits for six to 12 months. If your financial difficulty lasts longer than that, you could run out of benefits.
Finally, find out what else might be an issue. In some cases, you are still charged for your premium, even as your benefits are being paid out. That can result in continued problems even as you are financially vulnerable. Another issue is that more recent charges might not be a part of the agreement. So if you are adding to your debt as a result of your financial problem, those new charges might not be covered until after they are a little older.
As with all situations, it’s possible to self-insure. One of the best ways to do this is with the help of a good emergency fund. Set aside money designed to help you meet your obligations in the event of a financial catastrophe. On top of that, do your best not to carry a credit card balance. If you pay off your balance each month, there is no need to worry about whether or not you have payment protection to begin with.
In many cases, credit card insurance is just too costly. The benefits are restrictive, and you will pay premiums plus interest. And, if you don’t carry a balance regularly, and have the protection anyway, it might not do you much good in a pinch.
What do you think? Is credit card insurance worth it? Leave a comment!