Lending Club Blog

Credit Card Protection Plans

I recently received a replacement credit card for one whose expiration date was approaching. During the activation process I was repeatedly offered a credit card protection plan. I declined the protection and after looking into the details, you probably should too.

Credit card protection plans may vary between the different card issuers, but they basically perform the same function. When a qualifying life event occurs, the plan will either pay your minimum balance for you for a certain period of time or freeze your account so that no minimums need to be paid. Such plans are marketed as taking care of you at times when you are too busy or unable to make payments yourself.

Applicable life events include things like losing your job, experiencing a disability, having a child, or getting married. Depending on the type of event, the plan may go into effect for different durations. So you might get coverage for a year if you lose your job or a few months after having a child.

The first thing that strikes me about credit protection plans is that they either freeze your card or only pay the minimum for you. So either your card becomes unusable, or you’ll be charged the maximum in interest and fees since you’ll only be have the bare minimum paid. As someone who uses a credit card a lot and always pays off the balance in full, both of these options sound terrible to me.

Cardholders who carry a lot of credit card debt may see this program as a viable option if they themselves normally only pay the minimum. So the next factor to consider is the cost. Again, costs vary between different programs, but about $0.90 per $100 of balance is typical. So you’d pay $90 a month on a $10,000 balance. Instead of using that $90 a month to keep yourself in debt as long as possible (which is what paying the minimum does) consider how much faster you could become debt-free by adding $90 to your minimum payment. Assuming an interest rate of 20% and a minimum payment of the greater of 2% of the balance or $50, paying an extra $0.90 per $100 towards your balance instead of to a credit card protection plan would allow you to pay off your card about 25 years sooner!

A final benefit offered by most plans is to pay off your entire balance (up to a specific limit) in the event of your death. Since this benefit is essentially life insurance, you should compare the costs of the plan to an equivalent life insurance policy. Most consumers will find that they can get significantly more life insurance for much less money than from this credit protection plan benefit. A $50,000 life insurance policy would cost me $6.13 a month, but the same coverage through credit protection would cost an astounding $450 a month!

Looking at the costs and benefits of credit card protection plans will probably lead you to the conclusion that your money would be much better spent building up an emergency fund to handle a financial difficulty, paying more than the minimum to retire your debt more quickly, or purchasing more life insurance for much less money.

Were you persuaded to try credit protection and are you now having second thoughts?

Saturday, March 28th, 2009 at 9:10 am

Comments (1)

  1. I got two calls from two different credit card issuers recently in
    regards to credit card protection plans. I refused to listen
    further the moment I knew the purpose of the call. I’ve nothing
    against credit card protection plans except I pay my balance in
    full every month. And I only use my credit card for small spending
    such as groceries instead of expensive luxury items. So I don’t
    need it. They are prospecting on the wrong cardholders. Those
    carrying balances would be much better and appropriate prospect.
    Many have forewarned add-on such as credit card protection plans is
    how the credit card issuers making money of their credit
    cardholders. From my prospective, if you got a need, where you are
    carrying substantial balance every month, you may want to look into
    the plan. And I agree with your call to compare the costs of the
    credit card protection plan to an equivalent life insurance policy

    March 28th, 2009 at 8:56 pm

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