The new federal consumer watchdog is sniffing at payment protection plans offered by one credit card company, highlighting a profitable plan for issuers that may not be worth your money.
Discover said late last month the Consumer Financial Protection Bureau (along with the Federal Deposit Insurance Corp.) is checking into the marketing of its payment protection plan. Industry experts interviewed by American Banker say this is the only the beginning of these types of probes.
At the heart of the investigation is an optional safety net offered by credit companies for a monthly fee. These plans work like this: If you experience a qualified hardship or major life event, such as a job loss, hospitalization or birth of a child, you can delay paying your credit card bill up to two years.
For each month of enrollment, Discover charges 89 cents for every $100 of your credit card balance. Some issuers charge more. That doesn't sound like a lot, but is a lot more than what credit unions charge (around 29 cents to 39 cents), according to sources quoted by American Banker.
"Paying a fee relative to every $100 of your debt is counterintuitive to the whole strategy of getting out of debt. You're getting into more debt ... just in case," says John Ulzheimer, president of consumer education at SmartCredit.com. "You would be better served taking the fees you would pay to 'protect' yourself and apply it to the balance so you can get out of debt faster."
Of course, banks push these plans because they are cash cows. The payouts are low and the margins are high. So high, in fact, if these plans were regulated like insurance products, they would be illegal, according to American Banker.
"These services are called 'enhancement services' for a reason," says Ulzheimer. "They enhance the bottom line of the issuer, not the cardholders."
Additionally, these plans are "full of exclusions and conditions," says Linda Sherry, director of national priorities at consumer advocacy group Consumer Action. She suggests looking into additional life insurance or disability insurance if you would like a backstop.
Ulzheimer also notes that most credit card issuers will work out a forbearance plan, settlement plan or debt management program if you are facing a hardship. Also, the National Foundation for Credit Counseling can refer you to an agency that can negotiate with your creditors.
Otherwise, sock away any extra money into an emergency savings fund. Check out Bankrate's emergency fund calculator to get you started.
Have you used a payment protection plan from your credit card issuer? Tell me more.
Follow me on Twitter: @JannaHerron