Should You Purchase Credit Card Insurance?October 2, 2010 - 9:01 am
When you apply for a credit card, you may be offered a service called credit card insurance. Perhaps because of the necessity of auto insurance and health insurance we’ve been convinced that we need insurance for our other products, too. Credit card insurance is usually an unnecessary expense that provides very little benefit.
What is Credit Card Insurance?
Credit card insurance promises to make your minimum credit card payments if you become unemployed or disabled and are unable to make your credit card payments. Credit card insurance is usually a percentage of your credit card balance. You don’t have to pay the fee out of pocket. It’s simply charged to your credit card every month.
Why You Don’t Need Credit Card Insurance
Ideally, you’re practicing good habits when it comes to using your credit cards. You’re not charging more than you can afford to repay and you’re paying off your balance in full at the end of every month. If you’re doing both of those things, you’ll never have a credit card balance that needs protection.
If you’re carrying a credit card balance, as many credit card users do, hopefully you have an emergency fund or savings account you can use to help make your credit card in case something happens to you or your income.
The cost of credit card insurance ranges from $.75 to $1 per $100 in credit card balance. If you have a $500 credit card balance, insurance is only $5 a month, but that’s $60 a year. If you’d put that $60 in a savings account instead, you could cover 3-4 minimum credit card payments if you needed to. And if you never needed the money it could go toward something else.
Credit card insurance is only cheap when your balance is low. If your credit card balance is $5,000, for example, credit card insurance would be $50 per month or $600 per year!
If you don’t increase your monthly credit card payment to include the credit card fee, your credit card balance will take forever to pay off. Most of your minimum payment would go toward interest and the credit card insurance fee, leaving just a small amount to bring down your credit card balance.
Alternatives to Paying Card Insurance
You might already have an insurance that will cover your credit card payments. For example, you may have disability and life insurance through your job.
There are a few options for making your credit card payments even without credit card insurance. For one, many credit card companies have hardship programs that will temporarily reduce your minimum payment. You could enroll in a consumer credit counseling program that would help lower your interest rate and minimum payment.
Credit Card Insurance Recommendation
Don’t buy credit card insurance. It’s just a gimmick credit card companies use to get more money from credit cardholders. You’re better off putting that money in a savings account and using it to pay your minimum payments when hardships come.