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 I 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 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 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, cedit 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” accruing 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.
However, your credit score does stay intact, and the bank stops interest accrual and late fees by essentially “freezing” your account. That’s not a bad thing, unless you actually need to use credit to get through the tough times.
What if you have more than one card? “You’d have to pay multiple plan fees and juggle them to protect all of your cards,” McHenry says.
As with any credit card offer, read the fine print. That’s often difficult to do in advance with these plans, because the bank usually doesn’t send the contract until after you are enrolled, although many let you call in to cancel at any time.
Those who are over their acount’s limit and with a history of late payments aren’t eligible for coverage. And if you’re close to your card’s limit, the monthly payment protection fee applied to your balance could put you over.
- The American Express Account Protector plan charges 85 cents for every $100 on the monthly-balance statement. It pays up to $500 of a cardholder’s minimum monthly payment for up to 24 months, depending on the life event, and it lets you continue to use the card while it’s making payments on your behalf.
- Discover’s Payment Protection rate is 89 cents per $100 and suspends payments, finance charges and late fees for up to 24 months as well as payments for “celebration” events like marriage and relocation for one month. Discover allows you to charge up to $1,500 while the plan is activated, with waivers on interest and minimum payment. If you make a payment toward that $1,500, your credit line remains open for use.
- Bank of America charges 95 cents per $100 for its Credit Protection Plus and cancels up to 18 months of monthly payments for involuntary unemployment, disability or hospitalization. It cancels up to three months of payments for marriage or divorce, relocation, child birth or adoption, and entering or graduating from college. However, finance charges will continue to accrue on the balance.
- JP Morgan Chase & Co.’s Payment Protector is 89 cents per $100, but it does offer an alternate plan for 59 cents to retirees, those who are self-employed and others with special circumstances. You can still use your card up to the credit limit if you’ve activated the benefit, and minimum interest, late fees and accrued interest aren’t applied during the time. The benefit time frame for job loss can last up to 24 months. There’s also an annual “payment holiday,” letting you suspend one payment per year for a household, medical, education or transportation expense of up to $50.
- Wells Fargo’s Credit Defense defers payments for up to 12 months for job loss, and up to three months for temporary leave of absence. Credit Defense Platinum pays the card’s minimum payment for up to six months. Both plans charge 89 cents per $100. You can keep using the card when benefits are approved, but any additional charges incurred are your responsibility.
You’re also not eligible if you’re already unemployed. Many companies want you to be employed for 30 to 90 days before enrolling, and Wells Fargo demands at least four months. Forget about enrolling if you left your job voluntarily.
Only full-time employees need apply. The majority of credit card companies don’t cover part-timers working less than 30 hours a week, seasonal workers or self-employed.
If you activate payment protection after being laid off, you’ll need to show proof that you’re receiving state unemployment benefits. Some issuers have waiting periods, stating you must be unemployed for at least 30 days before they’ll activate the plan.
In the World’s Foremost Bank fine print that Young received, payment protection for a job loss resulting from temporary disability meant “you must be physically unable to perform any work or service for wages, gain or profit.” A doctor’s note is required for card payment suspensions. Miss a month of sending in the proper documentation for any claim and your protection disappears.
Many of these plans offer to cancel credit card balances of up to $25,000 if the cardholder dies. But the cost far outweighs the death benefit, says Geri Detweiler, credit adviser for Credit.com.
“Many people think they’ll inherit the credit card debts when a spouse or parent dies, but that’s not the case. Unless there’s an estate involved or a co-signer on the card, the credit-card company can’t go after the debt. It has to forgive it and take it off the books,” Detweiler says.
If you do meet requirements and then file a claim, your chances of benefiting from the plan are less than 100 percent.
Smith is also a blogger at WalletPop.com, a personal finance-focused Web site, and when he wrote about his experience with the payment protection plan, he got a raft of comments.
“A few people wrote that when they tried to file a claim, either for job loss or hospitalization, they were denied or their plan was canceled. I haven’t met anyone who says the plan helped them when they needed it,” Smith says.
Credit.com’s Detweiler also says she gets many complaints. “They’ve paid on these programs for years and then when they need it, they get the runaround and can’t collect. With an insurance plan, at least the state insurance regulator steps in to help you, but there’s no such protection for payment protection plans,” she says.
And because many credit card companies are raising their interest rates and fees, they’re looking for any credit-related flaw in your record to justify the moves, says Detweiler. “I’d be hesitant to let a card company know I lost my job,” she says.
Is this plan good for anyone?
Young still says yes, but only for those who pay off their balance monthly and on time, and know when to get out.
“It could be worth signing up for if you believe your job will disappear in 30 to 90 days. If you carry a $4,000 balance, a $40 monthly plan payment is likely less than your minimum payment on that balance. But don’t forget to cancel it if you survive company layoffs,” Young says.
For those who don’t want to do such advance planning or pay fees, Citibank, one of the few banks that don’t tout a payment protection plan, recommends another method. “We encourage those who are facing or anticipating financial distress to contact us directly,” says Citibank spokeswoman Jeanette Volpe.
That’s what most financial experts advise anyway. Call your card issuer directly and ask them to lower your interest rate. McHenry says card companies are more willing to negotiate these days.
“If they believe someone will default completely on his balance, he is more likely to work out a payment plan, stretch payments over time or take a bigger lump sum to forgive some debt,” McHenry says.
Detweiler says it’s even worth calling if you think you’ll need help with just one or two card payments. “You can get them reduced or waived just by asking, especially if you have a good credit report,” she says.