Ever get the call from your credit card company offering you credit card “balance protection”, “balance insurance”, or “payment protection”? Do they push peace of mind? Just say NO.
Regardless of the name, credit card balance insurance products basically promise to either pay down your balance in the event you die, or pay/suspend your minimum monthly credit card payments in the event of involuntary unemployment or disability.
The problem is, balance insurance costs way too much for far too little.
Is Credit Card Balance Protection Worth It?
Canadian credit card balance insurance usually costs somewhere between $.99 per $100 of your average daily balance to $1.19 per $100 of your average daily balance.
That means, if your average credit card statement is $1,500, it will cost you ($1,500/$100)*$1.19=$214 per year whether you use it or not and whether you pay down your balance every month or not!
If you were already paying a hefty interest rate of 19.99%, your new effective interest rate with the balance protection would be closer to 35%!
To see just how bad this value may be, consider this. Let’s say you’re carrying a month to month balance on a low rate credit card with an 11.99% interest rate. Using the example above, the balance protection insurance would cost you an effective annual interest rate of 14.3% – that’s more than the APR of your credit card!
That means the protection is more expensive than the product itself! It’s like paying $1,500 on a warranty for a TV that costs $1,200. Think about it, the unemployment coverage only pays the credit card’s minimum monthly payment, sometimes a little more. The minimum monthly payment is calculated on an 11.99% interest rate. You’re paying 14.3% per month for the balance insurance protection – and you’re not even likely to use it!
When Do I Pay For Balance Protection Insurance?
In most cases, you pay a premium on the greater of your statement balance OR average daily balance. Your average daily balance is another way of saying the average daily credit card spend over the course of a statement period, before you paid down your bill. So even if you pay down your bill every month on the due date, you’re still paying an insurance premium on the greater of your average spend between statements or the balance that appears on your statement.
So imagine you spend $1,500 at the beginning of the month on your credit card, but you pay it down at the end of the month. You would still owe $14.85 in balance protection fees that month alone!
The problem is, for most people who pay down their credit card bill every month they have no need for credit card balance insurance. In fact, even if they were to die unexpectedly, many of those same people still have the cash on hand to pay down their bill.
Are There Cheaper Alternatives?
The only reason to take out balance insurance is because you’re looking to protect yourself or your family. However, in the case of death, your estate can use the proceeds from your life insurance policy to pay down your debts. If you think you need more coverage to pay down your credit card debt, it would be far cheaper for you to simply increase your life insurance policy than to get separate creditor insurance.
In the case of unemployment, remember, your balance won’t be paid off. Usually, they will either defer your payment or pay the minimum monthly payment due. Instead of paying exhorbitant monthly premiums, you’re far better off setting aside what you would have paid in balance protection fees into your own savings account for a rainy day fund.
Balance protection is rarely, if ever, worth the cost. In fact, it offers such poor value, most U.S. credit card companies have stopped offering it because of regulation and lawsuits.
In almost all cases, you’re better off putting the equivalent in balance protection fees into your own savings account, or taking out a little more in life insurance.