While shopping at his local sporting goods store, Josh Smith was intrigued when the checkout cashier told him about the deals he'd get by signing up for the store's Visa card offered through World's Foremost Bank in Sidney, Neb.
He'd get $15 in-store credit just for signing up, plus another $10 if he enrolled in the card's payment protection plan. If Smith lost his job, became hospitalized or disabled, married or divorced, World's Foremost Bank would cancel his minimum monthly payment for up to six months. The cost: 99 cents for every $100 of his balance at the end of the billing cycle.
"I was told I wouldn't pay any fees if didn't carry a balance, and I could cancel within 30 days and not get charged," says Smith, an adjunct business professor at Bluffton University in Bluffton, Ohio. He signed up, and when he got his first statement, he found a 37-cent fee, even though he had paid off his balance before it accrued any interest.
Smith wasn't concerned about losing his job when he got the card. But banks are hoping payment protection plans will appeal to those who are worried enough so that they will pay a little extra for a hedge against financial misery. Still, that 99-cent monthly fee can add up, making these plans more of a problem than a protection.
Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md., says more banks are promoting these plans to current and prospective card customers. "There's a 'stuffer' offering it with my bill every month. They make it seem so easy. No signature required, just initial here and suddenly, you're signed up," she says.
However, the people who need payment protection the most are those who can afford it the least, Cunningham says. "You could be paying hundreds of dollars a year on a plan that, hopefully, you may not even use. There's no guarantee that you'll qualify, and if you do, you may have to jump through hoops for the company to honor its plan."
Payment protection plans are basically marketed as insurance policies. You pay a monthly premium for protection, which kicks in if a situation such as a job loss or major illness prevents you from making card payments. The plan essentially suspends your account, stops interest accrual, waives payments and stops late fees for a certain time period. No fee is charged if you've paid off your monthly balance on time.
In the past, this plan type was called "credit insurance," and it was an actual insurance product subject to government regulation. Nowadays, companies have set them up as "debt-cancellation plans" to avoid regulation, meaning they don't qualify as true insurance, says William Burfeind, executive vice president of the Consumer Credit Industry Association in Chicago. "It's just a contractual agreement between a lender and borrower."
Burfeind says the average fee is 50 cents for every $100, but many big credit card issuers charge nearly double, including American Express, Discover, Bank of America and JPMorgan Chase & Co.
Big fees, lots of ineligibilities
The fee sounds small, but it can add up, especially if you carry a big balance or can't pay in full every month. If you have a $2,500 balance, an 89-cent fee will cost you $22.25 monthly and will be added to your balance as another "purchase," which will accrue interest. If your balance remains the same over a year, that's $267 more you'll have to pay annually. "Signing up for this plan could increase your overall interest rate by 50 percent to 100 percent," says Justin McHenry, president of IndexCreditCards.com, a Web site for comparing credit card offers.