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Have you been offered a protection plan for your credit card? Two words: stay away.
So what do we have against credit card protection plans?
Well, the same disdain we have for all over-priced services that offer few tangible benefits.
What Are Credit Card Protection Plans?
Credit card protection plans have been around for years. You might remember them under their old name — “credit insurance.”
These protection plans may sound good. But they actually are not worth the money you’ll pay extra each month.
The coverage you’ll receive from your credit card protection plan depends completely on your credit card company. This means you need to read the terms carefully to understand what will be covered.
Usually, the coverage will go into effect if you become disabled and cannot work. The coverage almost always takes effect as well if you lose your job.
Once your protection coverage begins, all interest on the account will stop, late fees will be disabled for a set period of time, and you won’t need to make credit card payments.
This sounds great.
But there is a downside.
You will not be able to use the card during the period of time. You’ll pay for this coverage each month with a percentage of your balance added to your account.
The Cost of Credit Insurance
The fees for protection plans can range from $0.50 per $100.00 to $1.00 per $100.00 of your balance. Of course, the higher your balance and the more you spend, the more you pay for the protection plan.
You also get hit twice by this fee because your card issuer will add the fee to your statement as if it’s a purchase. It will be subject to interest and any penalties just like any other transaction!
Why We Want You to Avoid Credit Card Protection
Obviously, you see how expensive credit protection plans can be. But maybe you still think they are beenficial.
One of the biggest things to watch out for with these plans is the strict eligibility requirements you’ll need to meet.
It can be very hard to claim coverage with these plans. For example, you won’t be eligible for a claim if you were unemployed when you started coverage, if you quit your job or if you leave the job by your own choice.
Anyone that’s self-employed with also not be eligible to claim job loss under any circumstances.
Even if you are a full-time employee of an eligible job, you’ll probably have to wait at least 30 days before you can file a claim with the protection plan. What’s more, you’ll still need to provide proof that you have applied for unemployment benefits.
It isn’t just hard to become eligible for protection plan claims; you’ll most likely have a lot of trouble if you ever need to put in a claim.
Many people find themselves unable to get coverage, even when they’ve paid for the plan for years. It’s not uncommon for the credit card company to simply cancel the plan when you need to make a claim! State
Attorney General Offices in a number of states have received countless complaints about these protection plans. Unfortunately there is no regulation and there’s nothing they can do.
It’s up to you to protect yourself from these so-called “protection plans” by not signing up and planning yourself for emergencies.
That’s right. The whole thing is one giant gotcha. They gotcha fees. And you gotcha no protection.
So What Should You Do?
Now you know the lowdown on these protection plans: what they cost; what (little) they do for you; and why you should avoid them.
But, if you’re concerned about what can happen to you financially if you lose your job or become disabled — particularly how you’ll pay your bills — you can protect yourself.
It will require more work on your part. But it will save you money and heartache at the end of the day.
Here is what we recommend.
First, start planning now by saving money each month for an emergency fund.
You should also work to pay down your credit cards as soon as possible so they don’t begin to strangle you if your income is cut or reduced. There are a number of ways you can save money to pay off your credit cards.
If you’re really in trouble, you may also qualify for a number of credit card hardship programs that are reformed and available from all major card issuers.
You may also consider purchasing your own insurance policy that will cover your credit card accounts. This will give you more power than the credit card protection plan, will cost less and be more reputable; you don’t have to worry that your insurance company will refuse payment when you’ve paid your premium and held up your end.