Credit Card Protection?

Jun 18, 2012 by

You May Be a Target But You Don't Have to be a Victim!Has your credit card issuer tried yet to sell you its branded credit card protection insurance product? If you have a sizable (i.e., profitable, for the card issuer) account balance, you’ll be targeted, if you haven’t been already. People who carry balances are like miniature gold mines to credit card companies.

(Note: What is commonly called credit card protection insurance is actually debt protection insurance. But for consistency with common usage, I’ll use the term card credit card protection insurance in this post.)

What Is Credit Card Protection Insurance?

The sales pitch behind credit card protection insurance goes something like this: If one of a specified list of events happens to you, the insurance will make your minimum credit card payment or otherwise assure you don’t become delinquent on the account—for a while.

As an example, here’s a list from U.S. Bank’s website of the unfortunate events that allegedly would trigger a credit card protection insurance benefit pay-out from its product, called BalanceShield:

  • Involuntary Unemployment – for 30 days or more
  • Hospitalization – for two or more nights
  • Disability – for 30 days or more
  • Nursing Home Care – for two or more nights
  • Leave of Absence – for 30 days or more
  • Loss of Life – cancel your outstanding account balance

The beneficent U.S. Bank would make the cardholder’s minimum credit card payment for up to twelve months should any of the first five events befall the unfortunate debtor. (I’ll point out here that U.S. Bank’s credit card profits would be maximized if all of its customers made only the minimum payments each month.) And if you’re fortunate enough to expire—bullet six—while in enormous debt to U.S. Bank but protected by BalanceShield, your heirs will be grateful. (Debts would otherwise be paid from a decedent’s estate, generally.)

How Much Does Credit Protection Insurance Cost?

U.S. Bank charges a premium of 85 cents per month for every $100 in balance.

That means the monthly credit protection insurance premium on a $2,400 balance would be $20.40. Annualized, the premium would be $244.80. That’s financially equivalent to bumping up the account’s APR by about 10.2 percentage points. Buy U.S. Bank’s BalanceShield product for an account already sporting an 18% APR and you’ve effectively volunteered to make your APR 28%, resulting in a 56% increase in your already high interest costs.

No wonder credit card issuers push protection insurance: Ka-CHING!

Is Credit Card Protection Insurance a Good Bet?

In short: No, for almost everyone, almost all of the time. Check these excerpts from a March 2011 Government Accountability Office report entitled (in language only a bureaucrat’s mother could love) “Consumer Costs for Debt Protection Products Can Be Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight“:

“Fees for the nine largest credit card issuers’ debt protection products range from $0.85 to $1.35 per month for every $100 of the outstanding balance.” (U.S. Bank—@ $0.85—may be leaving some money on the table!)

“In the aggregate, a relatively small proportion of the fees consumers pay for debt protection products is returned to them in tangible financial benefits [emphasis added]… in 2009 the largest nine issuers reported that they collected $2.4 billion in fees for debt protection products and provided back to consumers $518 million in monetary benefits. Thus, consumers received 21 cents in tangible financial benefits for every dollar paid in fees—that is, a payout ratio of 21 percent.”

“These products can be difficult for consumers to understand, but federal agencies offer few educational resources to aid consumers in assessing them.” (I’m unclear why it would be the government’s responsibility instead of the seller’s to explain commercial products sold to consumers, but be that as it may…)

The Lawyers Get Involved

The credit card protection insurance business is a litigation magnet it seems:

  • In April 2012 the state of Hawaii filed suit against Bank of America, Barclays, Capital One, Chase, Citi, Discover and HSBC “alleging that these companies improperly charged their Hawaii customers for products not requested or for products that did not provide the benefits claimed.”

“An example of an alleged improper charge is where a credit card company bills a consumer for something called “payment protection” or something similar, which supposedly pays the cardholder’s required minimum monthly payments in certain circumstances. The consumer is not told of the numerous restrictions, and often the consumer doesn’t qualify for the product in the first place. Solicitations for these products are often telemarketing calls using predatory tactics to sign up customers for services they either don’t want or don’t qualify for.”

  • In January 2012 Capital One settled with West Virginia for $13.5 million a case partly involving practices involving the sale of payment protection. (Capital One denied liability.)
  • In 2011 Discover agreed to pay Minnesota $2 million as a result of a lawsuit which “alleged that Discover made aggressive, misleading, and deceptive telemarketing calls to sign people up for optional financial products, in some cases, charging people’s credit cards for enrollment even though the consumer did not agree to purchase anything.  In other cases, the company tricked people into unknowingly signing up for these products, usually by inducing consumers to say “ok” or “yes” to a benign statement without understanding they are signing up and then treating that response as authorization to bill their credit cards.” West Virginia and Missouri may also be suing Discover, according to a report the company filed with the Securities and Exchange Commission.

While this litigation is mostly about how credit card protection is marketed not whether it’s worthwhile, that the industry is pushing the product so relentlessly indicates to me that protection insurance is highly profitable—even net of legal costs and settlement payouts—which means it’s a bad deal for consumers, to my way of thinking.

Would You Buy Credit Card Protection Insurance?

Can you envision circumstances in which buying credit card protection insurance would make sense for you? Would you be concerned that, even if you bought the product, you’d have trouble collecting benefits?

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