Is purchasing a debt protection product through my credit card issuer a good deal?
American consumers spent over $2.4 billion dollars in 2009 with the top nine credit card issuers for debt protection products, according to a recent report issued by the General Accounting Office of the United States (GAO). The report was titled, "Consumer Costs for Debt Protection Products Can Be
Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight."
Debt protection products are purchased by consumers to protect them against unexpected financial hardship that could make meeting monthly payments difficult. These debt protection products may cancel, pay off, or suspend part or all of a consumer’s credit card debt under specific circumstances.
According to the GAO, debt protection products offered directly by the credit card issuers have been increasing in market share, compared to credit insurance products that were offered to credit card customers through third-party insurance companies, which used to dominate the market.
Benefits vary among products, with most debt protection products covering loss of life, disability, involuntary unemployment, and leave of absence from employment. Some products also cover other events, such as the birth or adoption of a child, marriage, relocation, divorce, hospitalization, call to active U.S. military duty, retirement, loss of a spouse or child, or natural disaster.
After a qualifying event, debt protection products can suspend the cardholder’s need to make a monthly minimum payment or even cancel the outstanding balance. Debt protection products offer the consumer peace of mind, by paying some of the debt or by preserving the consumer’s credit rating through preventing delinquencies on accounts.
Costs can be High
Problems with debt protection products are often not about the benefits they provide, but about the costs to the consumer and clarity of the disclosures given to consumers, so they can make informed decisions. Costs for coverage, according to the GAO, ranged from $.85-$1.35 per month for every $100 of debt on the consumer’s account. In a year’s time, the costs are multiplied by twelve, which would be $1.02-$1.62 per $100 of debt, or 10.2% to 16.2% of the debt on the account. For a person with a $10,000 balance, the yearly cost would be between $1,020 and $1,620. Consumers should consider whether the fee for this service is better spent paying down the account balance or purchasing a more comprehensive disability policy whose benefits are not restricted only to credit card debts.
Another problem is that consumers often don’t understand exactly what they are purchasing. They often don’t know what kind of events are covered and what are not, nor do they have a solid grasp on what kind of payout will come to them at a time they qualify for the benefits. The products are marketed to emphasize the good, but it takes a sophisticated consumer to ask the right questions so he or she can understand what kinds of events are included and what are excluded. For instance, someone with a pre-existing medical condition may not be covered. Also, some debt protection products "restrict hospitalization or disability benefits for customers with preexisting health conditions. They may also exclude from unemployment coverage cardholders who are employed part time or seasonally," the report said. Despite these types of confusion, the GAO said it receives very few complaints from consumers about debt protection products, only “approximately 1 complaint for every 100,000 of these products that consumers held.”
One reason why it is hard for consumers to fully understand exactly what they are purchasing when signing up for a debt protection product, is that the providers are not required to provide the full terms and conditions in advance. The GAO report stated, "We called customer service representatives of the nine largest issuers and requested that the issuers mail us copies of the full terms and conditions of their credit card debt protection products. The customer service representatives of seven of the nine issuers told us they would not provide the terms and conditions unless we enrolled in the product."
New Regulations Upcoming
In July, 2011, the Bureau of Consumer Financial Protection (CFPB) will take over regulatory supervision of debt protection products. The CFPB will be “an independent bureau within the Federal Reserve System that will help empower consumers with the information they need to make financial decisions that are best for them and their families.” The GAO report recommends that the CFPB:
- “factor into its oversight and regulation of credit card debt protection products, including its rulemaking and examination processes, a consideration of the financial benefits and costs to consumers, and
- incorporate in its consumer financial education efforts ways to improve consumers’ understanding of credit card debt protection products and their ability to assess whether or not the products represent a good choice for them.”
Debt protection products are often bundled together, to cover a large variety of events, such as job loss, disability, or death. Because of this, consumers may purchase coverage for events that are unlikely to happen and offer little benefit. Consider your current and future financial needs, before you purchase any debt protection product. Review your current insurance coverage. Are you already covered through some kind of disability policy that you hold individually or through your employer? A more comprehensive disability policy, that covers other bills, not just credit cards, offers more benefits, but will be more expensive.
One of the primary benefits of debt protection products is that it helps preserve a credit rating, at a time of a qualifying event. However, unless all of your cards are going to be covered, your credit rating could suffer.
There are scenarios where debt protection products make good sense. For example, someone in the market to buy a home, car, or other large purchase where credit rating is key to qualifying for a loan and also determining the interest rate that will be charged, who is concerned about his or her job security may want to find a debt protection product a good way to ensure no delinquencies from appearing on the credit report.
Many consumers buy debt protection products in response to aggressive marketing by card issuers. Often, consumers choose to pay for this product without understanding what they are buying and then do not read carefully the terms and conditions when they arrive in the mail. Some debt protection services use a "gift card or cash-back certificate to customers as an incentive for enrolling in debt protection products."
The bottom line is that the consumer should take steps to be an informed consumer, when purchasing any financial service. Consumers considering debt protections products should keep the following in mind:
- Do you need the product. Don't buy something that is not likely to benefit you, because some salesperson convinces you that you do. Think about the likelihood that you will need the service, before you pay for it. If the chances are remote that you will experience a qualifying event, does it make sense to buy a debt protection product?
- Do you understand what you are buying? Read the terms and conditions, before you buy, if they are available. At the very least, read them afterwards, during the period when you can cancel without any obligation. Some products cover making only your minimum monthly payment for a period of time while others may cancel the balance, which is a huge difference.
Given the conclusions of the GAO report and the fact that the CFPB will examine debt protection products for their value to consumers and then be able to enforce new regulations, consumers interested in this type of product should keep their eyes open to see what develops.