If you have credit card payments, and are worried about your ability to pay in the future, credit card payment protection plans can seem tempting. Unfortunately, as tempting as these may be, they are rarely an efficient use of your personal finances.
What are credit card payment protection plans?
In a nutshell, credit card payment protection plans are insurance policies. You pay a monthly premium and if you become unemployed, or are unable to make payments, you can envoke your insurance for up to two years. The protection is supposed to exempt you from payments, interest and fees. And your credit score remains intact. Plus, many credit card companies send you a check. This check (ranging from $10 to $20) is “free” money that automatically enrolls you in the plan. But, as with all such offers, it is important to read the fine print.
The cost of credit card payment protection plans
As with any insurance plan, credit card payment protection costs money. Most credit card companies charge right around 89 cents for every $100 of your credit card balance. So, if you have a $3,000 balance, you will be charged $26.70 per month (3,000/100=30; 30x.89=26.70). This is added to your balance and becomes another “purchase” that accrues interest.
Will your credit card payment protection plans really cover you?
Check the coverage. This can be difficult, since all of the fine print is usually unavailable until after you cash the check and become automatically enrolled. But some of the caveats to coverage include the fact that self-employed people, as well as those who work less than 30 hours a week, may not receive coverage (but you’ll still pay for the service). Also, over limit and past due accounts may not be eligible for coverage. So, it can be a real bummer if your monthly payment protection fee puts you over the limit.
Is it worth it?
Probably not. You can negotiate lower interest rates with your credit card company, and you can figure that the fee used for payment protection can be better used for actual debt reduction. However, if your credit card balance is at zero, and you pay it off every month, and you are employed full-time, it might be worth a go. The protection is free if you don’t carry a balance. However, the fine print is required. You may not be covered at all if you don’t carry a balance. But, if you already carry a balance, and especially if you are self-employed, credit card protection plans are a pretty bad deal.