Credit Card Insurance: The Ultimate Junk Fee |
By Alexander Carl on April 5, 2010
.jpg.aspx?width=75&height=75) It would seem responsible to insure your credit card— if you use it frequently, you’d want to protect your account from misuse or depletion, right?
That depends on how relevant the “protection” is.
What does credit card insurance do, anyway? It’s there to cover a monthly minimum payment when you cannot. There are multiple options offered in insurance plans, but typically you can insure for disability, unemployment, defective purchases, and death.
Like other insurance, the deductible you pay in based on what you are insuring: your debt. A general rate among credit insurers is 85 cents per month for every $100 worth of credit.
So, what’s the catch? It covers only the monthly minimum payment.
Most debtors, unless they are under extreme debt, are capable of paying a minimum on their balance. Doing so month after month won’t actually pay off your debt— it can only extend it.
Getting credit card insurance is not about eliminating your debt, or even paying it off. It is simply a means of extending your line of credit through difficult times.
Note that some plans do pay off all debt upon the cardholder’s death. However, this brings up another point:
Credit insurance means lending money to pay your own debt. Insurance is really a funky sort of loan: You, the insured, loan the insurer a percentage (the insurance rate) of a premium in case of some specified loss. If that loss occurs, the debtor (the insurance company) pays back the “loan” in full to cover the loss.
The funky part comes from the lender (you) paying interest to the debtor. This interest “ensures” that the insurance company can give you the full loan principal right when you need it.
But with credit interest, you have to pay a percentage of your own debt to cover the repayment of another percentage in the event of loss. Instead of getting a cash return from the insurance company, you just multiply your debt.
Why you should you do this? Only if you have too much risk to be covered for life insurance, when it could help your inheritors pay off your debt.
Otherwise, don’t bother.
Credit insurance covers numerous products in addition to credit cards. Many are included as an unnecessary tack on to inflate payments on car loans or home mortgages.
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