Worried about what will happen to your credit card debt if you are injured or unemployed?
Payment protection plans offered by credit card companies promise to take all those worries away but for a hefty price.
Some plans offer to pay your minimum monthly payments, suspend your minimum monthly payments or even cancel your minimum monthly payments for certain covered events including involuntary job loss, hospitalization and disability.
But you'll want to think twice before signing up for one of these ultra-pricey protection plans.
"These protection plans sound like a good idea, especially during tough economic times. But in most cases, these protection plans are a bad deal for cardholders and should be avoided," says Bill Hardekopf, chief executive officer of LowCards.com and author of "The Credit Card Guidebook."
Expensive fees. The monthly fees for these types of payment protection plans are awfully steep.
Citibank charges 87 cents per $100 of new balance each month. Chase and Discover charge 89 cents per $100 of your ending statement balance. And Bank of America charges 95 cents per $100 of the plan balance shown on a customer's monthly credit card statement.
Here's an example of just how expensive signing up for a payment protection plan can be if you carry credit card debt from month to month.
Let's say you're interested in a payment protection plan that charges 89 cents per $100 of your ending statement balance each month and you have $5,000 in credit card debt.
You'd pay $44.50 per month for a payment protection plan. And if you maintain that balance for a year, you'll wind up paying $534 to insure that you won't fall behind on minimum payments for $5,000 in credit card debt.
You'd be better off putting that $534 in an emergency fund. That $534 will cover quite a few minimum credit card payments if you should need it.
Another good use of that money is paying down your credit card debt.
"Whatever you were going to spend on these plans, apply it to your balance and start whittling it down," Hardekopf says.
Exclusions and limitations. Another drawback with payment protection plans is the numerous exclusions and limitations associated with the plans.
With some payment protection plans, seasonal workers may not qualify for the protection for involuntary job loss. And self-employed workers may be excluded or have a tough time qualifying for the unemployment benefit as well.
If you are close to your limit on your credit card or you have a history of late payments, you may have trouble qualifying for a payment protection plan. And if you are currently unemployed, you will not be eligible, Hardekopf says.