the protection racket

Most, if not all, revolving credit providers (credit cards, home equity loans, etc) offer an account protection product where, for a fee, your account is protected in the event you lose your job or get disabled or something.  Generally, the protection takes one of two forms:  Either the service will cancel your debt in full up to a cap, or your payments will be deferred for a while.  The charge for this service is usually based on your average daily balance, NOT your end-of-cycle billed balance.  There are definitely benefits to account protection services, but there are also some pretty nasty pitfalls that I’m going to try to shed a little light on in this article.

First, the two basic types of protection.  Debt cancellation is the better of the two, since after the qualifying event, your debt simply goes away (again, often up to a maximum amount.)  Something to check on for this type is what exactly happens in the event of a payoff:

  • How soon after the qualifying event does the payoff happen?  Some debt cancellation products will make you wait one or two billing cycles before the payoff, and you’re still on the hook for payments in the meantime.
  • What is the form of the payoff?  Is it a direct account credit or do they mail you a check?  Direct credit is good because it Just Plain Happens, whereas sending you a check means you have to worry about it being lost in the mail, transit time, depositing it in a bank, moving the money from the account it was deposited to to the account you’re paying off, etc.
  • What happens to the account after the payoff? Is it left open (great!) or is it closed? (hrm.)  If it’s closed, is it reported to the credit bureau as closed in good standing, or closed as a collections payoff?  Either way your credit score is going to go down, but showing the account as closed in good standing hurts your score SIGNIFICANTLY less.

Payment deferral is less useful.  In a nutshell, after a qualifying event, your debt stays put, but you don’t have to make payments for a while.  Common things to look out for:

  • How are the deferred payments handled?  Is an amount equivalent to your minimum payment due credited to your account each month (great!) or are you just not required to send in a payment?
  • In the case of the latter, what happens with finance charges in the meantime?  Are the finance charges accruing silently in the background, then added to the account in a lump at the end of the deferral period?
  • Are you able to use the account during the deferral period, and if so, will that shorten the deferral period, interrupt finance charge deferral, or cause any other fees or penalties?
  • Are there any conditions that can cause the deferral period to be shortened or cancelled?  For instance, if the qualifying event is a job loss, and you start a part-time job while you look for full-time work, will that interim income (though it was never intended to replace your lost job) end the deferral period?

Second, read up on the qualifying events CAREFULLY.  Commonly, qualifying events include stuff like losing a job, becoming hospitalized for a minimum amount of time, or becoming permanently disabled.  Others may also cover taking a leave of absence from your job, death, death/job loss/disabling of another household member, etc.  Read the fine print to find out EXACTLY what is covered.  Gotchas include:

  • Are all types of job loss covered?  Some plans will not trigger a payoff or deferral if you get fired for cause instead of getting laid off.
  • How long do you have to be hospitalized?  Shorter is better here, 7-14 days is reasonable.  More than that is questionable, and protection plans requiring you to be hospitalized for a month or more are patently ridiculous.
  • Are there any restrictions or limitations on the reason behind your hospitalization, or the particular type?  For instance, if you’re hospitalized for a couple weeks due to complications from an elective procedure, does that ‘not count’ because it all started with the elective?

Third, the cost for account protection products is often expressed as a function of your average daily balance.  This is significantly different from your end-of-cycle billed balance, so be aware of this.  For instance, say you buy $3,000.00 worth of furniture on the first of the month, and pay it off in full on the 15th of that month.  At the end of the month, your billed balance is zero, but your average daily balance is $1,500.00.  If it’s paid off the day after it was charged, though, the average daily balance would only be $100.00.  Keep your average daily balance low by paying off your account as quickly as possible.  Note that some accounts will limit how many payments you can make in a month (there is actually a good reason for this, high ‘churn’ can be a symptom of money laundering) so this might have an effect on how soon you can pay off your balance.

Fourth, ‘blackout periods’ may occur.  For instance, you might be unable to file a claim for 30-60 days after the start of the account protection service so you don’t try to sneak in a claim after the fact.  The blackout period may vary by the type of qualifying event or claims may be limited on a sliding scale based on their proximity to the start of the account protection service.

Finally, read the fine print.  There are a number of pitfalls I haven’t thought of, and I’m sure there’s a number of lawyers devoted to thinking up new ones.  Read the fine print, and ask about anything you do not understand.  If you don’t get a satisfactory answer, walk away.

In the long run, account protection services are a gamble.  You’re spending a little money to save a lot in case something bad happens.  If nothing bad happens, then the money you spent is gone with no return on the investment – whether you think that’s wasted is up to you.  Personally, if the price is low enough and there aren’t too many loopholes rendering the service useless, I think it’s worth it.  Think of it as health insurance for your credit card.  When it comes in handy, it comes in REALLY handy.

Author: pope crunch

fun fact: i am terrible at writing 'about me' or 'biographical info' blurbs hard to believe i know but it's true

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