Watch Out for Offers to Insure Your Credit Card Debt
Should You Insure Your Credit Card Payments?
It’s possible for Payment Protection insurance to seem like a good idea when you’re being sold by a pro. With some variation, depending on the issuer, this service costs around one percent of your monthly balance, along with keeping up on minimum payments. Your benefit is that if you are not capable of making your payments due to losing your job or becoming seriously ill, you can have that obligation deferred for up to two years.
That’s a pretty good deal on the surface. One percent isn’t much, and if you sacrifice that, you don’t have to be concerned with being charged extra for being tardy.
Be Skeptical About What You’re Getting…
There are some snags to watch out for when considering whether to purchase this service. Firstly, think about what it is you’re purchasing insurance on: unsecured debt. Unlike secured debt, which is anchored by some form of collateral like a home or automobile, unsecured debt is only based on your continuing to be capable of paying off your balance.
In a case where a debtor goes bankrupt, the creditors who have secured collateral are the first priority for restitution of outstanding debt. Only after the balances owed to these creditors have been resolved are the creditors without collateral able to be paid…assuming there are still assets that can be paid to them.
Because of the fact that they deal in unsecured debt, firms issuing credit cards actually tend to be fairly lenient with their customers. A long history of reliable payment can easily get you forgiveness for a few months in case you end up out of a job or in the hospital.
The reason for this is because they ultimately want to get paid back. So, if getting a few installments late means avoiding taking your entire debt as a loss in the end, then credit card companies tend to see it as worth their trouble.
…And What You’re Paying For It
Insuring your ability to pay your monthly minimum is also costlier than it often seems. However, charging 1% monthly comes out to 12% annually if the amount you owe remains the same. Except for those who carry a low interest credit card, your annual interest is probably around 15%, so tacking on this insurance would bring your total within the range of 28%.
The difficulty is easier to see when discussed in regular dollars. If you have a $1,000 balance on your card, the average issuer might oblige you to pay 2% of that amount monthly—in other words, a minimum payment of $20 per month. If you get your payment ability insured, it’ll tack on $10 per month, bringing the total you pay to $30 monthly. So, let half a decade pass and you will have parted with $600 for this service. While this amount could be smaller if you shrink your balance, a larger balance will make this insurance even more expensive.
The drawbacks are compounded when you realize that our theoretical $600 does nothing to pay down the $1,000 balance. And that sum only benefits you in case of a major problem. Plus, if you do invoke the coverage, the monthly payments on which a grace period is given will still include added charges for the very same insurance that allows them to remain unpaid, for a period, without consequence. Not to mention the fact that since those waived bills are just added to the balance of what you owe, that coverage instantly becomes more expensive.
Given this information, it’s clearly beneficial to be skeptical about how much insuring your ability is worth and the value of the coverage they’re offering.
Wouldn’t you get more out of your dollar if you deposited $600 into an emergency savings account?
In that case, you could use that money for anything you deem necessary and won’t need to worry about the card issuer’s assessment of the situation blocking the availability of those funds.
Or, short of that, just use the amount you’d otherwise use to pay down one percent of what you owe every month. If you don’t have a balance, then you don’t have to think about insuring your ability to pay it.
Guest article; NerdWallet.com is an online resource that gives people information to make the best decision amongst available credit card rewards, and was founded by its current Chief Executive Officer, Tim Chen. Tim goes further to educate folks about credit and debt management by writing for major publications including the Huffington Post, US News, and the Forbes Moneybuilder Blog.
Have you considered credit card insurance? Do you think it is a good investment?
image credit; insurancekatytx