You probably have heard the horror stories of people who lost their jobs or were confronted with another life-changing event that caused them to be delayed in their credit card payments. This usually results in sharply declining credit scores, which can lead to the inability to purchase a car, house or other item with a large ticket through financing. In addition, it can increase the interest rates on existing credit cards in the area of Maastricht and it is almost impossible to obtain new ones.
That is why so many people have signed up for credit debt protocols offered by all major credit card issuers. Another reason why people sign up is because they don’t want their families to suffer financially in case they die.
But a report released by the Government Accountability Office (GAO) raises doubts about how effective these plans are. If you spend your hard-earned money on one of these plans, read on to determine if you really need it.
What are credit card protection plans?
The theory behind the plans is that if something happened to your income stream, the protection product would cover your credit card debt. These plans relate to life events such as job loss, illness requiring hospitalization, disability, divorce, death or adoption of a child. The issuers say they would do one of two things in case you have to cash in the plan:
- They would suspend your monthly payments and interest until you can make the payments again.
- They would completely eliminate your debt if you were hurt so badly that you could never work again.
In the event that your payments are suspended, you should still pay the protection plan, as the premium is calculated as a percentage of your balance and added to your existing credit card balance every month. However, you would not be required to pay the premium or any interest, nor would interest have accrued until you started making payments again.
If the balance were eliminated, there would be no premium to pay because you would have no balance. Debt removal, as well as suspension of payment, would prevent your creditworthiness from being damaged because there is no negative balance to report.
Most people who buy the plans do this for peace of mind. It can be stressful to worry about losing a job and not being able to pay the bills. And for those who do get the coverage they expect, the plan can alleviate a difficult time by suspending their payments or, in some cases, completely abolishing the debt.
If you think there is a good chance that you will experience an important event in life, such as divorce, adoption or job loss, it might be in your best interest to consider at least a debt protection plan.
According to the GAO report, only about 70% of people who register in the plans actually receive benefits when they sign up. That is far below the average payout percentage of the insurance sector of 80-95%. This low percentage is a direct consequence of the fact that the issuers have created a confusing network of exceptions, caps and exclusions. For example, if you want to suspend your payments because you have lost your job, you must first prove that you have not voluntarily lost it. This can be difficult if your employer decides not to cooperate. And if you are admitted to hospital due to an existing condition, you are out of luck.
Even more alarming is that seven of the nine largest credit card issuers offering the plan will not allow consumers to review the exclusions and caps list until they have registered. If you are wondering if this is even legal, you are not the only one. Class action lawsuits have been popping up recently and accusing credit card issuers of selling policies to people who would never be eligible for the benefits.
Moreover, the plans are not cheap. They run anywhere from $ 0.85 to $ 1.35 a month for every $ 100 balance a consumer has with him. So, if you had a balance of $ 2,000 with you and paid an average of $ 1, 00, you would earn $ 20 a month, $ 240 a year or $ 1,200 for every five years that you wore coverage.
A debt protection plan can be beneficial for some people who are in an unstable work situation, or who are planning to adopt or divorce a child. But it’s still not an easy call because you should make the decision without having all the facts. The GAO recommended that the newly established Consumer Financial Protection Bureau investigate the case and determine whether these plans are fair to the consumer. In the meantime, run your own person-rich numbers and decide whether the guess is right for your finances.
Have you been successful with one of these types of credit card protection plans? Or did you submit a claim and refused it? Share your experiences and opinions in the comments below.
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