11/2/2012 4:00 PM ET|
Do you need credit card insurance?
A debt protection plan for your card seems like a way to gain some extra financial security. Most of the time, though, it's a bad idea.
It sounded like such a good idea at the time. It was 2009, the nation was in the middle of the Great Recession, the housing market was taking a serious blow, and Janet Summers (not her real name) decided she needed a little protection from life's big changes.
Her husband still had work renovating homes in the Charlotte, N.C., area, and Summers had a job, too. But when a nice woman from Sears called to ask if Summers would like to sign up for an insurance policy on her Sears credit card, it sounded like a good precaution to take. And at about $80 a month, it seemed like a reasonable expense.
The caller said the insurance "would cover my balance up to $10,000 in case I lost my job, had to take care of a family member, or my husband became unemployed and I was the only one working," Summers said in a recent email. "So I took out the insurance believing that this is a good deal."
Over the next three years, Summers paid Sears $3,000 for the insurance. Even in the midst of the recession, her husband's company continued to be profitable, as many people who had planned to buy new homes decided instead to renovate the ones they already owned.
Then, this March, her husband lost his job. The financial impact hit immediately.
"It was booming there for a while, and all of a sudden it just stopped," Summers writes. "And that's when I had to use my credit card to pay some bills, buy groceries, gas for my car and buy his medication, etc."
Immediately, Summers thought of her credit card insurance plan, which was pitched to her as a partial solution to exactly this problem. In most cases, such insurance will cover the cardholder's minimum monthly credit-card payments, for a limited time, after certain events such as unemployment, a handicap or a wedding, explains Gerri Detweiler, Credit.com's consumer credit expert.
But when Summers tried to claim her insurance, Sears hit her with a nasty surprise, she says. "They said it does not cover construction workers," Summers says.
Without that coverage, Summers and her husband are on a payment plan, paying $184 a month toward their Sears card debt. They can't really afford it, however. And Sears refuses to refund Summers the $3,000 she spent over the past three years paying for insurance that didn't actually cover her.
"I'm having to borrow money from people to put gas in my car and buy stuff to make sandwiches with," Summers says. "I don't have any money to live on."
Many consumers report experiencing similar problems with credit-card-based insurance programs. According to a study last year by the Government Accountability Office, such insurance is often expensive and the terms confusing.
"These products can be difficult for consumers to understand, but federal agencies offer few educational resources to aid consumers in assessing them," according to the study, and "cardholders received 21 cents in tangible financial benefits for every dollar spent" on fees for such debt protection plans.
"These programs are under fire because they often aren't great deals for consumers, even if (the programs) do pay out," says Detweiler.
Even if Sears did agree to cover the minimum monthly payments, interest would still continue to accrue on the principal, Detweiler points out. So although it would give Summers a break in the short run, it actually would cost her more over time, given all the extra money she would be paying in interest charges.
For consumers who find themselves in Summers' position, and for those considering whether to purchase a similar credit-card debt protection plan, here are some tips:
Don't do it. Most debt protection plans are expensive and confusing. They cost money in direct upfront payments, and even when they do pay out, they cost extra money in deferred interest payments. Besides, each plan has its own loopholes and exclusions that the issuer can use to avoid paying any benefit at all. "This is not the first time that I've heard this complaint," Detweiler says. "It's poor coverage for the most part, and most people would be better off saving that money."
The solution: Don't sign up in the first place.
If you do it, be careful. If you have high credit-card debt, or you worry you may soon experience a big drop in income, you may decide that a debt protection plan is right for you. If so, don't believe the promotional brochure or the words of a phone salesman. Get the terms of the insurance yourself, and read them. Make sure that it covers a job loss or medical problem you might actually experience.
And if you do it, you'd better be expecting calamity sometime soon. Paying $3,000 for a paltry $10,000 in maximum benefits shows just how quickly the expense of these products can stack up. The sooner the disaster, the bigger the financial payoff for the consumer.
Research your legal options. Suing Sears is an expensive proposition. Joining a class-action lawsuit with other consumers hurt by debt protection products may be a better option. Many of these suits have already succeeded, with Bank of America agreeing to pay $20 million to victims, Chase also settling for $20 million, Discover for $10.5 million and Capital One for $210 million. Most of these products are regulated by state laws, Detweiler says, so the easiest way to check for a potential lawsuit to join is to call your state's attorney general's office.
Protect what you have left. For a consumer like Summers, a monthly payment of $184 means she doesn't have enough money left over to afford groceries. If money is that tight, it may be time to consult experts, Detweiler says. Consider talking to a bankruptcy attorney. Also, make an appointment with a nonprofit debt-consolidation group that may be able to help you lower your monthly payments. For a list of reputable organizations, consult the Federal Trade Commission's registry.
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