Is credit protection for you?

Understanding the costs, limitations and alternatives of purchasing credit protection benefits consumers.

If you have ever applied for a credit card or loan, it is likely that you may have been offered an additional product that would postpone or make your payments if you died or became ill or unemployed. Michigan State University Extension educator Khurram Imam says, “Having peace of mind is important, but it’s also important to know if the product is a good deal and something that is right for you.”

Though programs vary by company, in general, the main types of “credit protection” are:

  • Debt cancellation programs: These are offered by the financial institution or credit card company. Its purpose is to eliminate all or part of an outstanding balance if the borrower dies, or reduces or eliminates the monthly payments due if the borrower becomes disabled or experiences a major life event (such as a non-voluntary job loss or the birth of a child) by making the payment on the borrower’s behalf.
  • Debt suspension programs: As with debt cancellation programs, these are offered by the financial institution or credit card company. These programs are designed to temporarily postpone all or part of the monthly payment while the borrower is facing a specified hardship. However, the borrower will still be expected to make the suspended payments in the future, although a late charge will not be assessed for the suspended payment(s). Some programs may even allow a borrower to postpone a payment once a year, such as during the holiday season.
  • Credit insurance: Different from debt suspension or cancellation, this product is offered through an insurance company. It pays the outstanding loan balance to the creditor if the borrower dies or will make monthly payments if the borrower becomes ill, injured or unemployed.

What should you consider before you agree to buy credit protection?

  • Do you have surviving dependents?
  • Could the payments be made easily without the insurance?
  • Do you have other savings or insurance that would cover the amount?
  • If you don’t have other adequate insurance or assets, would the balance on the loan cause financial hardship to dependents?

If you believe credit protection is right for you, be sure to fully understand the following:

  • Know the full terms and conditions before you sign anything.
  • Understand what is and isn’t covered.
  • Know what the coverage will cost you.
  • Consider alternatives to credit protection coverage.
  • Remember that credit protection is optional.
  • Try to resolve problems as soon as possible.

For more tips about what to consider before buying credit protection, read the Consumer Federation of America’s article Consumers Should be Cautious About Buying “Add-on” Insurance.

This article was adopted from the Federal Deposit Insurance Corporation Consumer News, Spring 2011 – Special Edition: Shop and Save…at the Bank.

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