Thursday, August 2, 2007

Does it Make Sense to Use Credit Card Protector Plans?

In this post, I'm NOT going to be getting into the wisdom of using or avoiding credit cards . . . though that is in the plans for future posts! IF you do you use a credit card (or cards), this post is to help you to determine if you should enroll in the 'Credit Protector (Citi),' 'Payment Protection (Discover)' or similar program.

First: Consider the Cost These programs sound so cheap. Citi's Credit Protector only costs "85¢ per $100 of the previous billing period's New Balance." Discover's program sounds very similar, but is not. It costs "89¢ per $100" of "your total balance at the end of each monthly billing period" thus including your old balance that you are still paying on. So, if a person is carrying a balance of $1,000, and charged $500 in one month, Citi's program would cost $4.25, and Discover's would cost $13.35 - quite a difference! Even Citi's program would cost $102 per year if you purchase $1,000 per month on average!

Second: Consider the Benefits Each program yields different benefits. Citi's program will cancel any new balance in the event of your death, up to $10,000. It also allows you to defer the total balance on your card for job loss, hospitalization, military reserves called to active duty, disaster relief, and many life events. "
While your account is deferred, finance charges and fees will not accrue and you will not be required to make payments on your account" (see full description here). Discover's program has similar benefits, but in the case of death would completely cancel your balance - up to $25,000 (see full description here). Thus Discover yields better benefits in the event of death. The benefits on these programs is similar, but not identical!

Third: Consider Your Situation If you are a regular user of credit cards, using them for regular purchases, then the cost of these programs is probably more than it is worth. To pay $102 per year or more would be foolish for most people, but you have to consider your situation carefully. There is one situation in which I think these programs makes sense! If you have stopped using your credit card and are currently working on paying off the balance, these programs might make sense - depending on which card you have. If your card's program is similar to Citi's, and would only cost you if you are accruing new balances, then it shouldn't ever cost you since you aren't using the card! Thus, it would be free protection, enabling you to keep paying off the balance, but to be able to suspend both payments and interest from accruing in the event that one of the listed events does occur. If the program on your card charges based upon total balance (like Discover's program), then the program probably will not be cost efficient.

Consider the factors for yourself. If you use your cards regularly, try to avoid these programs, as they seem to me just another way for credit card companies to take more of your cash. If you are working to pay off the balance on a credit card and are no longer using that card, look into it, as it may make sense for you!