Last week, we talked about the credit repair scams that seem to be running rampant in South Florida. Now, the Government Accountability Office has released a report about another type of “service” that might do consumers more harm than good. The GAO found that most credit card debt protection offers cost cardholders much more than they benefit them.
Credit card companies collected payments from cardholders totaling $2.4 billion dollars for fees associated with credit card debt protection. In contrast, cardholders only saw $518 million worth of benefits for those fees. The GAO has suggested that the newly formed Consumer Financial Protection Bureau provide more information to credit card consumers outlining the benefits and costs of these kinds of programs.
So what is a debt protection plan? At many of the top credit card issuing companies (banks included), consumers can pay a monthly fee for the security of knowing that if they find themselves in a difficult situation, their required monthly payment could be waived.
For example, at Bank of America, cardholders can pay 95 cents for every $100 in their balance for debt protection. In Florida, that fee allows them to “cancel” some of their monthly payments in various situations such as:
- Adopting a child or giving birth to a baby
- Losing a job
- Becoming hospitalized
- Getting married or divorced
According to Bank of America’s website, the so-called “Credit Protection Plus” plan also allows the cardholder’s estate to cancel up to $25,000 of debt if the cardholder dies.
At first glance, this may seem like an inexpensive way to avoid significant debt problems down the road. Unfortunately, that 95 cent fee can quickly add up. A person who has a $5,000 balance would be paying nearly $50 each month for this “service” that he or she may never benefit from. Over the course of a year, the fee is more than $550. Of course, the higher a person’s balance, the higher the fee they pay over time.
For many consumers, the GAO suggested these plans are not worth the fees associated with them.
Source: CBS MoneyWatch, “Is credit card debt protection worth paying for?” Associated Press, 29 March 2011