Ask Money

Credit protection

Chris Farrell Apr 15, 2010

Question: I would like to know about the protection that is offered to keep your credit safe is worth the cost. Michael, Riverside, CA

Answer: With memories of the Great Recession still strong and the unemployment rate too high credit protection plans are alluring. Who wouldn’t want freedom from worry on their credit card bills for a period of time if they lose their job or are disabled? It’s one less financial concern during a stressful time–at least that’s the promise.

But as far as I can tell the reality doesn’t really live up to the promise. These programs aren’t worth the monthly fee in many cases. I would recommend steering clear of them unless the combination of math and benefits adds up in your favor. So far I haven’t seen such a plan. One way of thinking about a credit card protection plan is with the monthly fee you’re increasing the interest rate on your debt. There are also a number of hurdles to leap to prove your spell of unemployment was involuntary or that you’re truly disabled.

It isn’t always a comfortable thing to hear, but financial products that promise you can ignore the personal finance fundamentals for a fee usually fall short. The financial planners I’ve talked to about credit protection always emphasize its much better to focus on getting rid of credit card debt, build up savings, own good life insurance, and buy a decent disability policy. And if it turns out you lose your job while carrying credit card debt it’s probably smarter to simply put away the credit card and make minimum payments to tide you over until a new job comes along. In most cases that’s a better strategy than relying on a credit protection policy.

The magazine Smart Money has a good, skeptical review here And pans credit protection plans here.

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