You get called into your boss’ office. Sitting next to him is the guy from human resources (we used to call that guy the angel of death where I worked). You know what’s coming next — you’re losing your job.
A thousand worries run through your head at once. Among the bills you worry about is your credit card. How will you pay it? What kind of crazy late fees will there be? What will happen to your credit score?
You may have heard of credit card insurance before. It claims to help you with your credit card payments like when you’re unemployed. You’ve probably seen it offered somewhere on a credit card statement, as an insert with your bill, or maybe on the back of your bill’s envelope.
Many credit cards offer “payment protection” or “insurance.” This service is meant to help you make your credit card payments in the event that you run into a financial emergency and are unable to pay your card as agreed.
If you make a payment (usually charged to your credit card), you are entitled to protection if you lose your job, or become disabled, or experience some other qualified calamity. These can be different forms of insurance or rolled into one. Your credit card issuer makes minimum payments (your minimum payment due) on your behalf for a certain period of time, until you are back on your feet. In some cases, your balance might even be forgiven (though this is rare).
How Much Does Credit Card Payment Protection Cost?
What you pay for credit card payment protection depends on your balance.
In many cases, it is common to pay between $0.79 and $0.89 per $100 of your balance. So if you have a balance of $1,500 on your credit card, and your cost is $0.79 per $100, your total cost each month will be $11.85. In many cases, the cost is added to your balance, and you will pay compound interest on the cost as well.
Of course, if you don’t carry a balance, you can get this protection for no cost to you each month. If you are sure that you won’t carry a balance, and you want the protection just in case you need it later on, then it might not be a completely bad idea.
Will You Get the Coverage You Need?
The main problem with credit card payment protection plans is that you may not get the coverage you actually need, when you need it.
Read the fine print. Then read it again.
Many of these plans require that certain conditions be met in order to trigger the coverage. You might have to be unemployed for a certain period of time before the coverage kicks in, or you might only receive coverage for a limited time — even if you are experiencing difficulties for a longer period of time.
If you have been paying your monthly premium (and the interest on it, remember this insurance is usually used by people who carry a balance), you might not actually receive the coverage you thought you were getting. On top of that, if you have been responsible and paid off your balance each month, but run into trouble and use your credit card, now you’ll start incurring an extra cost while you wait for the terms of your coverage to kick in.
Keep in mind this coverage is usually only for your minimum payment that would be due to the credit card company. The coverage would help prevent late payment fees and hits against your credit report for not paying your bill. But any remaining balance you have will still be charged interest every month.
Self-Insure Against Missed Payments
Rather than paying for credit card insurance or payment protection, consider protecting your finances yourself.
Have an emergency fund to help you deal with difficulties. Here’s a way to build up funds — instead of paying for credit card insurance put what you’d pay into a savings account. Also, do your best to pay off your credit card each month so that it isn’t an issue later on. Get rid of that balance now (you’ll also save on interest payments). If you know a layoff is coming then start cutting back expenses early. This is a way to reduce any balance you have and can help you from putting more on your card later.
Take care of your credit and finances now and you can avoid racking up debt and needing to make these insurance payments.
For most people, there is no need to enroll in a payment protection plan. Most of the time, it just ends up being too expensive, and you could just end up paying too much for too little protection.