Credit card issuers may offer you an add-on service to help with your monthly payments if you’re unable to. This payment protection is a type of add-on insurance that usually has a low monthly cost. Because the cost is so low, you may justify paying for it, but is it actually worth it?
What’s Actually Covered
Credit card payment protection may not actually cover your monthly payments. It certainly won’t wipe out your entire credit card balance (unless you die). Instead, your credit card issuer will suspend your monthly payments, interest, and fees under certain types of life events. For example, you may be covered when you when you lose your job or have a major medical issue that leaves you unable to work for a certain period of time.
There may be a limit on the number of payments covered. The length of coverage can vary depending on the type of event. Once you’ve exhausted your coverage period, you may be required to resume payments even if your financial situation hasn’t changed.
How Much It Costs
The monthly payment is based on your credit card balance. That means payment protection insurance gets more expensive when you carry higher balances.
If you don’t increase your monthly payment to cover the premium, you may not see your actual credit card balance go down. Part of your payment covers the fee and another part goes to interest. That leaves only a small amount to go toward your actual credit card balance. This could increase the time to pay off your balance and the amount of interest you pay.
You may be required to pay for coverage for a certain number of months before benefits kick in. That means you can’t add coverage today and then make a claim tomorrow. Coverage may not start for 30 to 60 days after you’ve added the benefit.
There’s a possibility you may never need the benefit. Having credit insurance can give you peace of mind knowing you have a solution for credit card payments. However, if you never actually use the insurance, you’ve spent the money unnecessarily. If you pay off your credit card balance each month, you won’t need credit insurance.
If you have to use your benefits, you may not be able to use your credit card. Along with suspending your payments, your credit card issuer may also suspend your ability to make new purchases. It makes sense – you shouldn’t use your credit card if you can’t afford to make new purchases. Without the insurance, at least you could use your card in a pinch, even if you could only afford to pay just the minimum for a few months.
Alternatives to Payment Protection
Many credit card issuers offer a hardship payment plan that can assist you if you’re having money troubles. Under the plan, you may have a lower minimum payment and interest rate which eases at least some of the burden, without the cost.
Rather than spend extra money on this extra insurance benefit, build up an emergency fund that you can access in case of a job loss, pay cut, divorce, or other change in your finances. You can use your emergency savings to make your minimum payments and avoid paying an extra fee for a certain you may not ever use.