Being too conscientious might work against you. People are usually rewarded when they plan ahead, but maybe this time slackers are doing the right thing.
Neurotic consumers are being pulled into credit card debt protection programs to guard themselves against their biggest nightmares, like disability or unemployment.
But the Government Accountability Office has found that these programs cost consumers far more than they pay in benefits.
The GAO said in a recent statement that in 2009 that the top nine credit card issuers received $2.4 billion on 24 million accounts for debt protection products but paid out only $518 million. This is a sweet deal for banks — they pocketed $1.3 billion in pretax earnings from the programs in 2009. For every $1 in debt protection fees paid by customers, banks earned 55 cents in pre-tax earnings. Cardholders, however, earn an average of 21 cents in tangible financial benefits for every dollar they spend on debt protection.
Marketing for these programs is everywhere. Direct mail, recorded messages and even telemarketers are abuzz about it. The benefits sound like a great deal for worrywarts. If you simply sign up for debt protection when you apply for a credit card, you will never have to lose sleep over involuntary unemployment, losing a child or spouse or other disruptive events. A tired, nervous person might pay just about anything to wipe away some of these concerns.
Since there is little data about these programs, most consumers have no idea how heavily they are stacked in the banks’ favour. On the GAO’s recommendation, the Consumer Financial Protection Bureau has said it will look further into debt protection products and educate consumers about them. If you think you need debt protection, there are some things to consider first:
-How likely is it that a qualifying event will happen to you? Note that some plans cover more events than others.
-Is it worth the cost? According to the GAO, fees were between 1.85% and 1.35% of the monthly balance. That adds up to 10.2% to 16.2% interest annually.
-Still think you need a debt protection plan? Make your own. Sock away some money each month in a savings account. Most debt protection plans cover only your minimum monthly payment. Saving $400 will give you enough of a cushion to pay your minimums for more than a year — and it costs you nothing.
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