Debt Protection Products: Do You Really Need Them?

Credit-Land.com has completed its study of The Government Accountability Office (GAO) report for the year 2009 that was released in March 25^th of this year.

The research study reports that costs of debt protection are not aligned with benefits that consumers expect to receive. In fact the prices that consumers pay for debt protection program are too high for the benefits.

One of the most arguable questions among American credit card holders is the benefits of debt protection products. These products promise the cardholders to cancel the credit card balance or suspend the minimum monthly payment when qualifying event occurs such as cardholder’s illness, unemployment, death of a cardholder or loss of a spouse.

Consumers may purchase the debt protection program when they apply for a new credit card or can add it to an existing account. Each product offered by major nine issuers covers a different number of emergency events, ranging from 4 to 12 events.

It is important for consumers using debt protection program to look at all fees associated with this program. According to the policy of credit card issuers the monthly fees are to be tied to personal account balance. These fees range from 85 cents to $1.35 for every $100 hold on debt. Thus such fees can amount to hundreds of dollars per year. For example, on a balance of $5,000 consumers may end up paying the annual fee from $510 to $810. At this rate, consumers will benefit more by paying off their balance or just saving their money in an interest-bearing account that can be used in emergency. So people with limited credit score who want to pay less will actually pay more. GAO reports that “as of 2009, credit cardholders had more than $800 billion in outstanding debt on roughly 600 million credit cards”.

Another problem with debt protection product is relatively scarce information on banks’ activities in this industry. GAO states that “credit card issuers are not required to report information about these products in Call Reports and Thrift Financial Reports, which serve as the primary publicly available sources of financial information regarding the status of U.S Banking system”. Credit Land study of independent statistics reports shows that consumers paid about $2.4 billion on 24 million accounts for debt protection products in the year 2009.

Taking into consideration the scarcity of public information on these products the Bureau of Consumer Financial Protection is going to establish new enforcement policy for financial products, including the credit card debt protection products. Under the new enforcement, the Bureau of Consumer Financial Protection will be able to ensure that the products are a fair value to consumers. This Federal Regulation will allow debt protection issuers to offer uniform pricing, terms and conditions nationwide.

While the OCC, the Options Clearing Corporation, takes the responsibility to regulate the debt protection products, American credit cardholders must take time to educate themselves about benefits of these products.

Here are some precautions that must be considered before enrolling into debt protection program.

• Questionable necessity. Ask yourself a question what is the likelihood that one of the qualifying event will actually occur to you.
• High fees.With the current monthly fee the annual interest rate may vary from 10.2 to 16.2. percent annual interest rate
• Benefit ceiling. Some products limit the benefits. For example, a customer enrolled in the program may be paying 0.85 fee on his balance of $20,000 ($170 per month), but the loss-of-life coverage will pay off only if the credit card holds the maximum balance of $10,000.
• Questionable benefits. Most of the protection plans cancel only your minimum payment $25 to $50 on $2,500 balance which means skipping only one monthly payment instead of paying down the balance.

Jennifer Brown

Jennifer Brown, an external business consultant working with a Fortune 500 company, has years of experience to her credit. Despite having a busy schedule through the day, she takes time out to write articles dealing with credit cards, payday loans and other financial aspects. She has completed her Bachelor degree in Financial Services from Columbia University and has been actively involved in various activities for the betterment of society.