February 19, 2009

Should you buy credit card insurance?

No, you should not buy credit card insurance.

The other day I got a mailing from American Express offering to enroll me in a protection plan. I bet that the credit card companies are advertising these plans more and seeing more interest in them due to peoples fears about the economy. Of course they seem to push them normally as well. You've probably seen these ads with your monthly statements advertising these plans.

The exact details of the plans all vary a little bit. Basically credit card insurance is a form of insurance offered by the credit card companies so that your credit card payments will be deferred if you suffer a job loss, illness or death. Basically they seem to just suspend interest and minimum payments. You still owe the balance of the debt in most cases. In the case of death they may pay off the balance up to a limit.

The insurance is about 0.8 - 0.9% of your balance. The Amex cost was 85 cents per $100. My Citibank credit card offers such insurance. They say: "It's free for the first 30 days, then only $.85 per $100 on your New Balance each month." So if you have a $10,000 balance then thats $85 a month. My Discover Card offers their payment protection plan for "as little as 89¢ per $100." I have another card I don't use much and it offers the protection for 83 cents.

The idea of insuring your credit cards seems like a good thing especially if you have a large payment that would be hard to handle in the case of job loss or illness. The cost of these plans offered by the credit card companies is not worth it.

If you are unable to make payments then the worst the credit card companies can do is harass you for payment and then eventually discharge the debt which will hurt your credit. They will not take your home or otherwise be able to get settlement of the debt. If you pass away then your estate may owe the bill, but they can not go after your relatives to collect a debt. You don' have to worry about burdening your relatives with an obligation to pay credit card debt if you pass away. In general the worst thing that happens if you can't pay credit card bills is that your credit rating may get hurt some. But this is not life threatening and there are a lot of other higher priority things to insure first.

If you're concerned about a job loss or medical issue that could keep you from paying your credit cards then I'd self insure and look for other forms of insurance. Instead of putting money into a credit card insurance program you could pay extra towards your credit card balance or set some money aside in your emergency fund. You can also make sure you are covered in the possibility of disability or death by having short term disability, long term disability and life insurance.

Stay away from credit card protection insurance plans, their rates are too high and they are not a good deal.

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