Credit Card Debt Management

Payment protection plans are offered by many loan providers. They are also referred to as payment protection insurance, loan insurance, etc. Regardless, for an extra monthly fee, the basic point is to provide a safety net for loan payments in the event of death or injury.

But do you really need it? A payment protection plan is typically very easy to sign up for. Unlike life insurance, there is very little paperwork and background questioning involved. The monthly fee, which varies by provider, is often tagged onto the monthly loan amount. Unfortunately, in the case of credit cards, this means it can accumulate interest when tagged onto the monthly credit card balance (if, of course, the full card balance is unpayable at the end of each month).

Costs can vary greatly. As an example, my credit card issuer offers a plan for 89 cents per $100 on the card balance each month. Over the course of a year, this can come out more expensive than term life insurance premiums, depending on the amount of the credit card balance. The FDIC’s web site points out the relatively high cost as another drawback, and suggests the money might be put to better use:

Let’s say you buy credit insurance or debt cancellation/suspension coverage to pay off a credit card debt if you become sick or die, and you consistently carry a card balance of $4,000. Various sources indicate that you’d likely pay between $150 and $350 a year for credit protection. For that money, you might be able to buy a much larger term life insurance policy or add to your emergency savings, both of which could be used to pay off any obligations, not just the credit card debt.

This is certainly not to say that payment protection plans should be ruled out in every case. Just weigh your individual situation carefully and consider all the pros and cons before committing. Remember that it is voluntary and you don’t have to sign up for it and also remember to read all the fine print.

Sometimes the terms and conditions of payment protection plans can be quite prohibitive, but without a careful review, you may not discover this fact until it’s too late. For instance, the FDIC points out that some credit cards might cut off available funds and prohibit card use for cardholders who need to start using their payment protection plan. I suppose this makes sense from the credit card company’s perspective, but then again, if you’re injured and unable to work, isn’t that the time when you might need the credit card most? At any rate, in most cases, well-stocked emergency funds and other insurance like disability and adequate life insurance should fit the bill just fine.