Some consumers worry about how they would cope with their credit card commitments if they lose their income through accident, sickness or unemployment. Some choose to take out credit card payment protection insurance (PPI) to protect them in the event that they cannot make payments for these reasons. How do card protection plans work and are they worth considering?
What is Credit Card Payment Protection Insurance?
These policies are set up to give some financial protection in the event that a card holder loses their job/income and cannot make their usual repayments. This is usually based on accident, sickness and/or unemployment issues. Policies can be taken out with the card company or with an independent PPI provider.
The aim here, if the consumer loses their income and meets the policy criteria, is for the insurance company to make some or all of the payments necessary to keep the credit card account in good order. This is often based on a percentage payment system although some insurers will make minimum payments only. Generally, the cover given by a credit card protection plan will last for up to 12 months.
Some policies (often those that base their payments on a percentage of the money owed on a card) will also make a final payment if necessary at the end of the claims period to pay off any outstanding balance. This is worth checking as some plans don’t do this and, in those cases, once the 12 months are up, payment responsibility will revert to the card holder.
It’s also worth noting that many plans will base their payments on the card balance when the claim was first made. They will not, therefore, deal with any debts that are made after this period. These will need to be dealt with by the card holder.
What are the Costs of Credit Card Payment Protection Plans?
Generally, payment protection plans offered by credit card companies will be geared to the balance on the account. This is usually charged as a set amount on a proportion of the debt. UK credit card companies, for example, are currently charging between 60-80p per £100 of balance. This is charged as a monthly premium.
So, a consumer with a balance of £1,000 and a rate of 70p per £100 would have a monthly premium of £7 under this kind of payment scheme. This is usually taken from the card account by the issuer and the premium that is owed can be adjusted as necessary to factor in rises and falls in balances each month.
Some independent companies may charge a flat fee but many operate on a similar percentage basis. It is worth noting here, however, that the consumer may have to take responsibility for increasing premiums if their card balance rises as this may not be done automatically by an independent PPI provider.
Are Credit Card Payment Protection Policies Worth it?
This really comes down to personal preference. Some like to have some form of payment protection in place; others don’t want to pay for cover that they may never need to use. On paper, this can look like a good deal but consumers should think hard about whether this is an essential for them. It is, for example, worth considering:
- How exclusions may affect any claim that is made. Paying for cover that will then not pay out is a waste of money.
- Whether they have other options in place that could replace their income if necessary. Some may, for example, have employer benefits, savings or other income protection policies.
- Whether a broader income protection solution that could also help them deal with other borrowings may be better than a single product policy.
Finally, those that decide that credit card payment protection is a good idea should make sure to compare policy costs before committing to anything. It may be more cost effective for some to take out a plan with an independent PPI insurance company rather than with the card issuer so this may be worth checking out first.
Source: FSA Money Made Clear
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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