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High cost of debt protection

By Lucy Lazarony · Bankrate.com
Monday, March 28, 2011
Posted: 11 am ET

A report from the U.S. Government Accountability Office reveals the high cost of debt protection products sold to credit card customers.

Credit card customers received 21 cents in tangible financial benefits for every dollar spent in debt protection product fees among the nine largest card issuers in 2009, according to the GAO report.

Debt protection products can cancel or suspend part or all of a credit card debt under specific circumstances such as loss of life, disability or involuntary unemployment.

The GAO report reveals that in 2009, consumers paid about $2.4 billion on 24 million accounts for debt protection products, according to data from the nine largest credit card issuers.

"Regulators have reported relatively few consumer complaints and have cited few formal violations related to debt protection products," the GAO report states. "However, fees for these products can be substantial, with the annual cost often exceeding 10 percent of the cardholder's average monthly balance."

The GAO report also states that debt protection products "can be difficult for consumers to understand, but federal agencies offer few educational resources to aid consumers in assessing them."

This summer, the Bureau of Consumer Financial Protection will assume supervisory and enforcement authority for financial products, including credit card debt protection products.

The GAO recommends the Bureau of Consumer Financial Protection factor into its oversight of credit card debt protection products "a consideration of the financial benefits and costs to consumers" and "incorporate into its financial education efforts ways to improve consumers' ability to understand and assess these products."

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