By Julie Jaggernath and Kevin Sun
While getting balance protection insurance for credit cards can help you be prepared for hard times, it’s usually not worth it. Not only are you paying too much for too little, but there’s a much better way to keep yourself financially stable in an emergency. Here’s what you should know before getting credit card balance protection insurance:
Credit Card Balance Protection Insurance Isn’t Credit Card Loss Insurance
Balance protection insurance, which can have other names like payment protection insurance and balance protector premium, is completely different from credit card loss insurance. Loss insurance protects you from theft and fraud – something that your credit card probably already does without you having to pay for it.
Balance protection may help pay your credit card when you lose your job, have a medical emergency, or pass away. It doesn’t give you more money, but just helps make your credit card minimum payments. What gets covered and by how much can vary from card to card, so make sure you know exactly what you’re paying for by reading the terms and conditions provided.
The Costs of Balance Protection Insurance Are Not Worth Its Coverage
Credit card balance protection works in addition to unemployment, health, and life insurance. Which begs the question: if you have all these already, then why do you need balance protection just for what you owe on your credit card? You might think there’s a cost advantage, but this insurance is expensive at around $1 a month for every $100 spent. For example, if you spend $1500 on your credit card in August and $2300 in September, then you’ll pay about $15 for August’s insurance and $23 for September’s. These amounts will be added to your overall balance owing, which can make them easy to forget or ignore.
1% is a lot to be paying every month for something you might never need – and unlike overdraft protection, it keeps getting charged whether you're using it or not. What’s worse is that when you do need it, it’s not intended to cover your whole balance owing. It will instead just make the minimum payments, which means you’ll still be saddled with the debt.
Check if You Have Balance Protection Insurance and Decide If You Need to Cancel
Some Canadians have reported being signed up and charged for balance protection without their consent. If you’re not sure if this happened to you, carefully search your credit card statements for charges you don’t recognize – if it has premium in its name, then it could be balance protection insurance.
Contact your credit card company if you find it and ask them to cancel your coverage if you don’t want or need it. You may need to insist strongly that the customer service rep you’re speaking with follows through – and provides you with written confirmation that your coverage has been cancelled. If they can’t provide you with proof that you signed up for it, insist that they refund all of your premiums to you. If they refuse, follow their complaint resolution process. Keep notes about whom you spoke with, when (date and time), and what was discussed. If you’re not able to resolve the situation with their ombudsperson, make a complaint to Canada’s Financial Consumer Agency.
You Can Make Your Own Insurance by Starting an Emergency Fund
The point of credit card balance protection insurance, like all insurances, is to make a plan in your good times so that you have enough in bad times. However, the cost and restrictions of credit card insurance makes it a bad deal for most people. A better way to use that money is to save it yourself in an emergency fund.
Instead of spending an extra 1% of your credit card purchases on balance protection insurance, save that extra 1% – and whatever else you can spare – in your savings account. This is money that only you control, and you can use it not just for your credit card, but any kind of emergency. Watch the fund grow and sleep well knowing that it will definitely be there for you if you ever need it.
Get Help with Understanding Credit Card Balance Protection Insurance
Rather than buying expensive credit card balance protection insurance, a much better way to ensure that you’ll be taken care of if something happens is to save up your own emergency fund. If you still have questions about insurance, want more practical personal finance advice, or are concerned about credit card debt or other kinds of debt, then contact a non-profit credit counselling organization. A professional credit counsellor in your area would be happy to help you reach your financial goals and ensure you’re prepared for hard times so that you can enjoy the good ones.