The Truth About Credit-Protection Services
If you’re in dire straits, a credit-protection program might seem like the answer. Learn what our experts have to say before signing up for this largely unregulated service.
Bad things can happen without warning: Your spouse loses a job. You break your leg and have to miss work. The boiler conks out. Events like these wreak havoc on your emotional well-being and cause financial distress, particularly if you have credit-card debt or other loan obligations. Which is why you may have gotten a call or a mailing from a lender—a bank, a credit union, or even a car dealership—touting a service that promises you relief from financial obligations. Sounds too good to be true? Indeed.
Most credit-protection programs make the same promise: If you’re having trouble making payments but are not in default, the lender will suspend or even cancel payments for the money owed for a specified period of time. Some will even let you off the hook for interest and fees that you might accrue in the future (for up to two years), as long as you provide substantial documentation of hardship (a doctor’s verification that you’re disabled, for example).
To receive benefits, you’ll usually pay 85 to 97 cents for every $100 of the loan balance each month. So if you owe $5,000, this “protection” will cost more than $500 a year. That’s about an additional 10 percent interest on top of the rate you’re already being charged. (For a credit card with a 20 percent annual percentage rate, this effectively increases the rate to about 30 percent.) The bottom line? “These programs are overpriced for what they offer,” says Birny Birnbaum, the executive director of the Center for Economic Justice, a consumer-advocacy center. A study released in 2011 by the Government Accountability Office verifies this: Data from the largest credit-card issuers showed that their customers spent $2.4 billion on debt protection in 2009 but received only $518 million in benefits in return. Furthermore, since these plans aren’t heavily regulated, they lack many consumer protections. “The eligibility requirements, benefits, and exclusions are buried in the fine print, and the payment practices can be deceptive,” says Josh Frank, a senior researcher with the Center for Responsible Lending, a nonprofit consumer-advocacy group.
How to Protect Yourself
Just say no. You’re better off using money you would have put toward a protection plan to pay off your debt. And if you’re worried about not being able to cover your bills if something happens to you or your spouse in the future, look into buying disability or life insurance instead, says Gerri Detweiler, an adviser for Credit.com, a consumer-education site. (Go to iii.org for more information.)