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FDIC Consumer News
Credit Protection: Understand the Costs, Limitations and Alternatives Before You Buy
Chances are your credit card issuer or lender has offered to sell you a product that would postpone or make your loan payments if you die or become ill or unemployed. These products may provide security and peace of mind, but how can you tell if the offer is a good deal and one that's right for you?
First, understand that these programs can vary greatly. In general, the main types are:
Debt cancellation and suspension programs are in many ways the same as credit insurance, but they are offered directly by an individual bank or credit card issuer, not through an insurance company. (Note: To keep things simple, we'll use the name "credit protection" from here on to refer to all of these products.)
What should you consider before you agree to buy credit protection?
Know the full terms and conditions before you commit to anything. Credit protection often is offered through a check-off box on a statement stuffer, online or verbally, with no contract to review until after the consumer enrolls. "You should request and review the full terms and conditions — not just a few words on a Web site or a verbal assurance that a program will take care of you — before saying 'yes' to credit protection," advised Luke W. Reynolds, Chief of the FDIC's Community Outreach Section. He added, though, that many lenders give new enrollees a short period (such as 30 days) to review the terms and conditions and cancel the coverage before they charge a fee.
Understand what is and isn't covered. For example, some credit protection programs suspend (postpone) or cancel (make for you) the minimum payment due, which is generally only a small percentage of the outstanding balance. Some programs may limit the number of monthly payments they will make on your behalf. And, while with some programs interest will not accrue during the coverage period, with others it will.
"In general, some credit protection programs may not make much of a dent into your outstanding balance," warned Reynolds. "Just making the minimum payment on a credit card or other loan means it will take you longer to pay off the balance owed, and you will pay more to the lender in interest over the life of the loan."
Some programs advertise that the debt will be cancelled if the borrower dies, but they likely will only pay up to a specified dollar amount, which may not be enough to pay off the full balance. In addition, some programs may only cover accidental deaths, not those due to illness or natural causes.
And if you apply for benefits under a debt suspension program for a credit card or a home equity loan, the terms of the agreement may state that you will not be able to use the card or loan during the claim period.
Know what the coverage will cost you. Many creditors describe the cost of a credit protection program as, say, 85 cents or 95 cents per $100 of the outstanding balance each month. This means that you will pay for credit protection on your purchases even if you pay the balance in full by the due date. For a borrower with a balance of $4,000, that would be $34 to $38 dollars a month. The charge is generally calculated on the average outstanding balance at the end of the month.
"These programs could easily cost you hundreds of dollars a year, and offer only modest benefits when you qualify for them," said Reynolds.
Consider alternatives to credit protection coverage. You may already have, or would be better off with, traditional life or disability insurance — even if the monthly fees are higher than those for credit protection programs — because the insurance policies would enable you (or your estate) to pay multiple debts or expenses rather than just one specific debt.
If life or disability insurance is too costly or you are ineligible for the coverage for health reasons, you might consider establishing an emergency savings account funded by the money you would have paid for credit protection.
Also, it's generally a good idea to call your creditors for assistance when you are facing or anticipating a financial hardship. "They may be able to lower your interest rate or monthly payment, work out a payment plan to stretch payments out over time, or perhaps even forgive some of the debt," said Victoria Pawelski, Acting Chief of the FDIC's Compliance Policy Section.
Remember that credit protection is optional. The lender cannot condition approval of your loan on whether you buy a debt cancellation, debt suspension or credit insurance product. Don't confuse these products with other types of insurance that may be required, especially insurance to repair or replace property (such as a home or auto) that serves as collateral for a loan, and private mortgage insurance (protection for the lender if the borrower doesn't repay the loan) that lenders can require for certain home loans.
Try to resolve problems as soon as possible. First, discuss the matter with your lender. If you're not satisfied with the outcome, consider contacting the appropriate government regulator for help or guidance.
The institution's federal banking regulator may be able to answer your questions or concerns about a depository institution's sale of a debt cancellation or debt suspension product. And if you're not sure which federal banking agency regulates a particular lender, you can get the name from the FDIC Call Center at 1-877-ASK-FDIC (1-877-275-3342).
For help and information regarding credit insurance, your state insurance regulator may be your best source of government assistance. To locate your state insurance department, look in your local phone book or check the Web site of the National Association of Insurance Commissioners (NAIC).
For more tips about what to consider before buying credit protection, see the NAIC consumer alert "Credit Insurance: Safety Net or No Net Gain?" The details are specific to credit insurance, but much of the basic guidance also can apply to debt suspension and cancellation programs.
Last Updated 11/18/2010