Credit card balance protection insurance — “it’s fantastic for the banker but horrible for consumers.” That’s exactly what I told CBC’s The National when they asked what I thought about this product. I didn’t hold back.
Credit card balance insurance is rarely sought out by consumers, but sold by banks claiming it “can help pay down your balance faster and can help maintain your credit rating” if you get sick or lose your job.
If I could have called out BULL$HIT on a CBC television news interview, I would have. Instead of yelling at the top of my lungs, I went on air and explained (in polite Canuck fashion) why you should avoid credit card balance protection insurance and how to protect yourself instead.
Here’s my interview with CBC Go Public’s Erica Johnson which aired on CBC’s The National.
1. It’s a VERY expensive insurance policy
I read through a few credit card balance protection insurance policies and found some similar costs. For starters, the premium is calculated as a percentage of your balance owing, charged monthly.
Let’s say your insurance premium is $1.19 per $100 of balance, OK? On a $2,000 balance you’re paying an additional $23.80 per month to have this insurance.
This additional monthly fee turns a 19.99% annual interest rate to the equivalent of nearly 35%. What kind of robbery is a THIRTY FIVE PERFECT annual interest rate on a credit card? It’s highway all the way.
2. But I don’t get charged if I pay the balance off monthly!
Nope. In order to not get charged the monthly balance protection premium, your credit card statement must have a $0 balance when you receive it. This means you’ve gotta pay off your entire balance BEFORE the statement is even created.
WHO DOES THIS?!? I wait to get my credit card statement and THEN I pay the sucker off.
The problem is many bankers and sales agents push this product when you sign up for a credit card and say you won’t get charged if the balance is zero. That’s technically true, but there is likely a huge misunderstanding what zero balance means and when the premium is applied. Don’t be mistaken.
3. It’s a costly fee!
Whether your premium is $25 or $85 a month, it’s an extra charge on your plastic and can quickly add to your debt load. There are many instances where the insurance does not pay out at all, and it often only covers a fraction of your balance. I can see why so many people get caught by this fee.
4. Narrow definitions of ‘sickness’ and ‘job loss’.
If you think your illness or job loss is fully covered by credit card balance protection insurance, think again. Claims can easily be denied, as seen in the CBC’s story I linked above. If you have this insurance, please pull out your policy and give it a careful read. And before signing for this coverage, please read the fine print on what constitutes an illness or job loss according to your bank.
Sickness. No one wants to become disabled or ill. And no one wants a claim refused if you’ve been paying for balance protection. The bank’s definition of getting sick or disabled may not be what you think! The illness and disability coverage can be very limited — for example, only certain cancers and strokes may be covered. Breaking your leg, dealing with depression, or falling ill with pneumonia may not be covered.
These policies also lack underwriting, so there is no medical check to substantiate your situation.
Job loss. Credit card balance protection insurance policies can vary on how they define a job – how the bank defines your work is NOT up to you. For example, some policies will not cover you if you work less than 25 hours a week under one employer. This is highly problematic given the changing nature of work. Many paying gigs these days are contracts, freelance positions, gig economy jobs, or precarious in nature.
Photo: Gary Moore, CBC
If you’re a self-employed freelancer like me, than you likely have several employers and various contracts that when the hours are combined add up to at least one full time job. Try explaining this claim to a banker who defines work as a traditional corporate job with a single paystub. Your claim for job loss would likely be denied despite paying the monthly premium.
5. Don’t assume your full credit card balance will be paid off.
If your claim qualifies, the insurance payout can be limited too! If you think the bank is going to pay off your whole credit card balance, think again! If you lose your job or become ill, the insurance often only pays a fraction of your balance owed each month, and only up to a maximum.
For example, one policy I reviewed would pay 10% of your balance for 10 months, up to a maximum of $50K. If your balance is $1,000 then it covers $100 bucks a month, but you still have to pay the insurance fee of $12 a month. So you’re getting NOWHERE. Plus, if you’re sick and outta work you’re probably still adding to your credit card balance monthly, so that credit card debt is a compounding balance pushing you further into debt.
Photo: Gary Moore, CBC
Not great insurance for you, and likely a major stress when you find out this coverage barely covers you whether you’re sick or seeking work.
Skip Credit Card Balance Insurance. Do this instead!
You will never need credit card balance protection if you plan ahead and get adequate disability insurance, life insurance, and save up a small emergency fund. Plus you will likely save hundreds, maybe even thousands on insurance premiums over your lifetime.
Here’s the CBC Go Public story: Canadian Tire tells wife of ailing customer to pay his $18,000 debt, despite credit card insurance
By being prepared for the worst and planning ahead with the right insurance for you – not your banker – you are far more likely to have your claims covered and come out ahead.
Love love love,