Monday, April 21, 2008

Credit Card Balance Insurance

My wife’s credit card was reissued recently and she had to go through the usual activation process. She placed the 800-number call and was prepared to go through some automated menus to activate the card. To her surprise, an actual human came on the line to ask her if she wanted to buy balance insurance for a little less than $1 per $100 of balance.

My first thought upon hearing her story was that credit card balance insurance must be very profitable if the bank is willing to pay people to annoy customers while they activate their credit cards. Even though she declined the insurance, I decided to investigate further.

Check out this pdf document from the Financial Consumer Agency of Canada for useful credit card balance insurance information. It turns out that this nearly 1% insurance charge is applied every month!

The Financial Consumer Agency offers this understated warning: “Credit balance insurance is usually more expensive than regular forms of disability or life insurance.” The insurance charges from the big 5 Canadian banks compound out to between 9.4% and 11.9% per year!

The list of conditions that must be met to collect on the insurance contains the following ominous line: “your account must be in good standing.” I’m not sure how “good standing” is defined, but it seems like something that could be used to deny insurance coverage just when you need it. If you’re thinking of paying for credit card balance insurance, you should find out what “good standing” means.

Unless I get some evidence to the contrary, I’m going to lump credit card balance insurance into the same category as extended insurance coverage on consumer items: pure profit for the sellers. All such offers sound to me like “would you like to pay extra for that?”

5 comments:

  1. Would you like to BIGGIE your Credit Card for an extra $10 a month?

    --C8j

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  2. My Roommate told me about a year ago that he pays 89 cents per $100 outstanding balance per month. He lives paycheck to paycheck and only pays the min on an overextended $1000 limit card so the bank is making major money on his account.

    However he refuses to buy term life insurance or house insurance (condo townhouse) on the mortgage he carries in the house I rent in. Go figure.....

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  3. David: It sounds like your roommate might be one of those guys who serves as an example of what not to do financially.

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  4. Trust me. I don't duplicate the money management or financial planning style my roommate does. He chooses to live paycheck to paycheck and I refuse to.

    However I think this credit card insurance is really targeted to those would would need it the least. Paycheck to paycheck people who refuse to pay off high interest. Sounds like ral bad insurance policy.

    It's also offered on Lines of Credit account. Now many people misuse line of credit but what if you had a secured line of credit, one where you only pay the interest every month and NOT a portion of the principle?

    If you used your secured line of credit to do a major renovation, start a business or purchase a second used car etc etc, would "balance protection insurance" make sense then?

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  5. David asks:

    "If you used your secured line of credit to do a major renovation, start a business or purchase a second used car etc etc, would "balance protection insurance" make sense then?"

    Probably not. Balance protection insurance is a mix of different types of insurance and varies from one provider to another. There may be life insurance, long-term care insurance, employment insurance, dismemberment insurance, etc. Unless you need all of these types of insurance, it doesn't make sense to pay for them. For example, if you are starting your own business, you likely won't be able to collect on employment insurance. So why pay for it?

    The best approach is to figure out what types of insurance you need and then find the least expensive way to get covered.

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