Another Credit Card Gotcha: Debt Protection

We've all had the lesson drummed into us: Miss just one credit card payment, and not only will you rack up penalty fees and see your interest rate hiked, but your credit score could go down the flusher. Lose your job or sustain some other hardship that causes you to miss multiple payments, and you figure you'll wind up in the 7th circle of hell. Given all that anxiety, it's no wonder that consumers have been spending billions for debt protection plans sold by credit card companies to make sure that said credit card companies get paid on time.
A new report from the Government Accountability Office shows that the plans are absolutely great deals -- for credit card companies. Consumers, however, pay a lot and get very little in return.

For starters, the coverage is expensive. In 2009, when the GAO did its survey, fees for the nine largest credit card issuers' debt protection plans ranged from $0.85 to $1.35 a month for every $100 of the outstanding balance. If the accountholder carries a $2,500 balance and the fee is $1, he pays $25 a month -- or $300 a year. (If his balance rises, he'll pay more, and if it falls, less.)

And what does the consumer get for these fees? If he suffers some specified problem -- death, disability, involuntary unemployment or a leave of absence from a job, the card company promises to do one of three things, depending on its program. It might cancel the balance or the minimum monthly payment. Or it may suspend the minimum monthly payment and waive the interest. (A few programs cover birth of a child, adoption, marriage, divorce, relocation, hospitalization and other life events.)
As you'd expect, there are exclusions and restrictions. The card company might not pay off if you lost a job that was part-time or if you were hospitalized for a pre-existing condition. Some limit the number of triggering events per year. No getting divorced, fired and hospitalized in the same six months. Some plans place a cap on the total amount accountholders could receive -- from $500 to $25,000. Others allow suspension of payments for up to 24 months for disability but only one month for other events. Information about such loopholes, exclusions and fine points are not readily available to consumers, however. The GAO called all nine companies and asked for a copy of their plans' terms and conditions; seven said that they would not disclose the information to a customer until he had enrolled.

About 70 percent of consumers who made claims got paid. Some 24 percent were denied, more than half of them because claimants couldn't or wouldn't provide documentation that, say, they had lost their jobs involuntarily.

The sad fact of the matter is that consumers get very little for their debt protection dollars. According to the GAO, the nine large credit card issuers raked in $2.4 billion in fees in 2009 for their debt protection products. But they paid only 21 percent of that in claims. In fact, the issuers laid out more -- 24 percent -- in administrative expenses. An enormous chunk of the money -- 55 percent -- was pure profit. Payout rates for other types of insurance are vastly higher: 95 percent for auto insurance, 83 percent for group life and 80 percent for health insurance, for example.
Letting fear goad you into buying this pricey protection is a mistake. If you are anxious about dying and leaving the family with unpaid debts, worry not. If your relatives' names are not on the account, they are not liable for payments. If you are terrified about losing your job, use the fees you would have paid for debt protection to pay off your balances. And if you do get laid off, call the credit card company and try to negotiate a payment plan.

Bankers would no doubt say that the fees for debt protection buy peace of mind. But peace at these prices? I don't think so.

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