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Credit protection plans hardly pull their weight


It's important to remember that credit card issuers are businesses. While they may not necessarily sell a tangible product (other than a sleek piece of plastic) they are very much in the business of making money. Interest, clearly, is the primary profit generator. In the last several years, however, more marketing incentives and added services have come online to generate fee-based revenue for those how don't spend much and therefore, don't provide a great deal of interest income to the company. One of those services is the credit protection plan. And like most add-ons to a credit card, they aren't worth it.

For a monthly fee, companies offering these plans claim that should something happen to prevent payment of your balance, they'll handle it for you. Job loss, injury and even death may be reasons stated to buy by a plan. However, the pages of fine print that accompany such plans is full of loopholes and ultimately offers more protection for the card issuer than the card holder.

For example, the unemployment insurance does not engage if you were let go for performance reasons, as opposed to being laid off in the traditional sense. Employers often cite "performance" as a reason for dismissal to avoid the public stigma that accompanies having to reduce staff by layoffs. By most peoples' standards, being "let go" qualifies as losing your job. Not so, say most credit protection agreements.

In fact, many credit protection plans only work in your favor if you are unable to do any work at all, perhaps because of a medical hardship. If a writer becomes stricken with carpal tunnel syndrome for example, he or she may not be able to type for their career but the credit card company would argue that a writer could use voice-activated software and thus avoid providing coverage.

And since these programs are run by the same people who can develop individual marketing pitches based on where you shop for undergarments, rest assured that they will contact your employer should you file a hardship.

Credit protection plans are also pretty expensive, often running up to $.99 per $100 dollars of debt, meaning that a $5,000 balance could cost you an extra $49.50 per month. Worse yet, the plan costs are tacked on to the balance, thus increasing interest, financed charges and other balance-based fees. Without question, you are better off using that money to attack the balance.

If you carry life insurance, there is even less need for a credit protection plan. Most of them do not kick-in until after private insurance policies and do not provide nearly as much additional coverage as a standard term or whole life policy. A credit protection plan may offer $10,000 worth of coverage for $300 per year while a typical insurance policy would run around $250 per year for $250,000 worth of coverage.

Lastly, most protection plans only pay the minimum amount on your balance. And you know what happens when that is all that gets paid. So while interest continues to accumulate and your balance only gets bigger, you end up only deeper in debt because you paid extra for a plan that doesn't really help you when you need it.

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