|
||||||||||
 |
|||||
 |
|
 |
|||
 |
|||||
The offer of credit card insurance, which is often enclosed with credit card bills or peddled by credit card customer service representatives, is a tempting one. Who wouldn’t like to have the certainty that their credit card payments would be picked up by an insurance company, in the event of unemployment or illness?
It’s a great proposition, and credit card insurance would be a great program, except for a couple of things: Firstly credit card insurance is costly, and secondly, should you need the protection, the company you take out the insurance with may fail to deliver. Let’s look at each of these issues in detail.
Cost of Credit Card Insurance
The true cost of the insurance can be difficult to discern. Credit card insurance is not billed as a separate payment, but rather as a small monthly fee tacked onto the outstanding balance. The fee ranges from $0.75 to as high as $2 per each $100 in credit card balance on your card each month. While that may not sound like much, that monthly fee essentially tacks a 0.75 to 2 percent extra monthly charge to your credit card balance. On an annualized basis, this is the equivalent of paying 9 to 24 percent interest on all credit card charges—with no grace period! Add that percentage to the interest paid on the credit card debt, and you’ll see why credit card insurance is a bad deal.
For a consumer with an average credit card debt of, say $5,000, the fee for the credit card insurance would run from $37 to $100 each month. For a card with an APR of say, 18 percent, the interest charge on the credit card debt would be $75 per month. In short, the credit card insurance fee can be as high, or higher than what you pay in credit card interest each month.
Further, should something go wrong, the insurance only covers the monthly minimum payment, until you get well or get back to work. The minimum monthly payment required varies, however, it is typically at around 2.5 percent of the outstanding credit card balance. So do the math: With a 0.75 percent to 2 percent required monthly fee for credit card insurance, every single month, you’d be paying about 33 percent to 75 percent each month of the monthly coverage you’d receive under the insurance coverage.
Credit Card Insurance May Not Cover Claims
According to numerous consumer reports, credit card insurance programs are big on promises, but short on delivery. Consumers putting in a claim report being put through hoops or downright refused coverage.
Firstly, you must be able to prove that you are completely unable to work and will remain unemployed. Even a part-time, in-between job can disqualify you and ruin your claim. One woman reports having insurance on all her credit cards, but only two credit card insurance companies out of eight paid. In addition, she had to constantly fill out new paperwork to prove her disability every 30 to 60 days, depending on the company.
Statistics bear these stories out. According to MSNBC.com, in 2003, the Center for Economic Justice estimated that consumers paid $2.5 billion for credit card insurance programs. However, only $125 million were paid out in benefits.
So, if you have credit card debt and want to be sure you’re covered should unforeseen events arise, what are your options? If you have disability insurance or life insurance, you may already be covered, depending on the fine print.
If not, create your own credit card insurance program. Simply put one percent of the monthly credit card balance on each of your credit cards into an emergency savings account each month. After only a year, you’d have enough to cover credit card payments for three to five months. Keep at it, and before you know, you’ll have a substantial emergency fund, which may well prove useful for other unexpected situations as well.
If you become unemployed or ill and don’t have an emergency fund, call your credit card company and explain the situation. In many cases, the card issuer will work with you to find a temporary payment arrangement for your credit cards that works for you.
