Should I Sign Up for a Credit Protection Plan?
Apr 04 '01
The Bottom Line It can help to pay your account if you are not able to, but is it worth it?
I worked for a third party private label billing company for roughly 7 years. We handled approximately 12-14 clients, each with their own credit card protection plan. Here are some of the basics.
What is a credit card protection plan?
Credit card protection plans are available to insure your credit card account. With most credit cards received, there will be an enrollment form available for credit card protection at a certain fee. Even if you don't return the enrollment form, you are likely to get additional mail and phone solicitations encouraging you to sign up for the credit protection plan. Why do credit card company's try so hard to get us to sign up for the protection plan? Money, of course! The billing company will get a percentage for every plan enrolled. If you sign up for an application in a department store, the employee will often get an incentive as well.
Not everyone is eligible for credit card protection. Most plans require you to be under age 65-70 to enroll. You also must be employed at least 30 hours per week. This does not include people that are self-employed or working as an independent contractor.
What does it cover?
It may provide life, disability, unemployment, and /or theft coverage depending on the state in which you reside. Coverage may not be available in every state.
Life - In the event of your death, your account balance will be paid in full.
Disability - If you become temporarily disabled, and can’t work, the minimum monthly payment will be made to your account until you are able to work again.
Unemployment - If you lose your job through no fault of your own, the minimum monthly payment will be made for you until you are employed again.
Theft - Some plans offer theft coverage that will replace stolen merchandise that was charged to your account. You must file a police report, file a claim, and if the claim is approved, you will received a certificate to replace the stolen merchandise.
How much does it cost?
The rate of coverage varies from state to state. It usually ranges from 35-95 cents per $100 of your account balance.
For example: If your state charges 65 cents per $100, and you have an account balance of $1000 in the month of April, you would pay $6.50 for insurance that month.
This doesn’t sound like a lot of money, but when you consider the finance charges that will be billed, it adds up. Especially if you are in the habit of only paying the minimum payment on your account (a practice I do not recommend.) Let’s say you have a balance of $1000. You’re finance charge rate is 21% annually. You will be charged $17.50 in finance charges, and $6.50 for insurance. That’s $24.00. Many credit cards require a 33% minimum payment. That would be $33. Now let’s see. $33 minus $24 = $9. That is, $9 will be applied directly to the principle of your account. That will take you 5 billion years to pay off! Well, not really, but it would take a really long time. If you have no choice but to make the minimum payment, you may want to avoid the insurance for this purpose.
Should you sign up for it?
I do not recommend enrolling in a credit card protection plan. Here are a few reasons:
1. It only provides coverage for the card in which you enrolled. If you do not carry a balance on the card, you have no coverage.
2. The length of time to process claims. Most protection plans claim that they will start paying on your account within 30 days. In my experience working with these accounts, I have seen claims take up to 30 days just to be approved, and the actual payment being made weeks later causing a delinquent account.
3. If you have a high credit card balance, it will take much longer to pay your balance off.
4. You probably won't need it. I know insurance in general is a good idea just in case something ever happens, but (see #5)
5. If you already have home, car, or life insurance, you may already have the coverage you need.
I hope this gives some information about credit card protection plans. You can refer to your service agreement for further details about coverage in your state. Usually an address or phone number will be provided.
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