The fine print in credit card insurance isn't so fine

american express cardIf you have any credit cards or have had some in the past, it's almost inevitable that you've been asked if you'd like to sign up for debt cancellation or credit card insurance. The pitch sounds like a pretty good idea at first, usually going something like this: If you lose your job or the ability to pay your debts, your debt cancellation service will pick up your credit card tab and make your payments for you.

Obviously, you'll have to decide for yourself it that's a good idea or not. But if you want an opinion, I think it's a terrible waste of your money. I think you'd almost be better off burning your cash in a fireplace, because at least you'll get something out of it (warmth and it's always fun to watch the flames in a fireplace). Still, it's nice to have a second and even third opinion, so I spoke to two financial and credit experts, and they, too, didn't exactly have a ringing endorsement for debt cancellation or credit card insurance.


Here's why.

It's probably more expensive than you think. It sounds cheap - you're going to pay maybe $0.75 to $2 per $100 of your debt -- to ensure that your bills are paid in the wake of something bad happening, and everybody's afraid of something bad happening these days. Still, let's say you are carrying $7,000 on a credit card. I'm no math whiz, but $100 goes into $7,000 seventy times, so 75 cents times 70 means you're going to pay around $52 a month for credit card insurance -- and that's only the low end. Pick a policy where you have to pay $2 a month for each $110 of credit you carry, and you'll get charged $140 on that $7,000.

But what's really insidious is that these monthly insurance payments aren't tacked onto your monthly minimum payment, says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. "It's being tacked onto your balance. So you might be paying a $200 monthly minimum payment, and then $100 in credit card insurance is being added on the back, so the balance is going to grow, which means it'll take longer to pay off your debt. You really are going backwards."

Cunningham adds that if you were to pay for debt cancellation or credit card insurance on multiple credit cards, "then that's really going to add up."

They're just paying the minimum payments. Let's make this very clear -- your debt is not about to be canceled, despite some companies calling credit card insurance, debt cancellation. "Ultimately, you're still responsible for your debt," says Avi Karnani, co-founder of Thrive.com and the head of strategic innovation at LendingTree.com. Karnani fears some customers with massive debt might think that credit card insurance is like winning the lottery: That if you lose your job, all your debts will be erased -- well, canceled, like the phrase "debt cancellation" would suggest. He imagines some people are probably thinking, "Hey, let me get one of those things."

It may be harder to get those payments paid than you think. "These policies are hard to collect on," says Cunningham. "The burden of proof always [falls on} the consumer.

Karnani agrees, saying that credit card insurance is a little like going on disability. "They're going to verify that you don't have a job."

Which you would expect, of course, but Cunningham adds, "There are a lot of hoops you have to jump through, and often times you won't qualify if you land a part-time job. Suddenly, you're not 100% unemployed, and your claim may be denied."

The Red Tape Chronicles, an online publication on MSNBC.com, recently did a masterful job portraying the seedy side of debt cancellation and credit card insurance. They noted that in 2003, the Center for Economic Justice estimated that consumers paid $2.5 billion for programs like credit card insurance, but card firms only paid $125 million in benefits. That may prove little -- not everyone who signs up for these programs will have trouble making the payments -- but it does show that it's a cash cow for the credit card industry and not its customers. And certainly there's no shortage of complaints on the blogosphere about debt cancellation services.

"When I was injured at work, I had insurance on everything,"
complained one woman on the money blog SmartSpending. "Only two credit card insurance companies out of eight paid. It is a never ending battle of paperwork to prove your disability every 30 to 60 days depending on the company. Your credit cards go unpaid, your credit gets ruined, but of course, it's our fault - not the credit card company, not the insurance company. (Customers are expected to know the fine print, even though the companies do everything in their power to conceal it.)"

Debt cancellation, or credit card insurance, really protects the credit card companies, not you. If you think about it, this is an insurance policy that the credit card companies are taking out against you, only you're the one paying for it, not them. The credit card companies don't want you to default on what you owe them, so they're asking you to pay them $52 or more a month. Then if you lose your job or a medical emergency sidelines you and you can't make the payments, there's less of a chance you'll default on your loans if they take over for awhile -- using money that you've given them. But, as mentioned previously, there's absolutely no guarantee that you'll necessarily get everything paid off, or in a timely manner.

Speaking of protection, that Red Tape Chronicles article makes it very clear: If you're signing up for a credit card, make sure you're the one filling out the application and not a clerk or a telemarketer. Sometimes, eager to land a commission, they'll sign you right up for the debt cancellation service without necessarily getting your permission.

If you really want to protect yourself, then calculate how much credit card insurance would cost you and put the same amount of money in a savings account. Then, if something bad does happen, you have a nest egg to protect yourself and, if you want to, use it to continue paying off your credit card debt. Or you could calculate how much the credit card insurance would cost you and, instead of putting the money in a savings account, add it to your monthly credit card payment and bring your total down that much faster.

Cunningham also points out that you may well be insured, anyway. If you have disability insurance, depending on the type of insurance you have, that may cover your minimum credit card payments. Or if you have life insurance, the whole idea there is that your loved ones get a ton of money so they can pay off debts. It's a nice idea, this credit card insurance concept, but only for the credit card industry.

Geoff Williams is a frequent contributor to WalletPop and AOL Small Business. He is also the co-author of the upcoming book, Living Well with Bad Credit.


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