Credit insurance and credit protection can be prudent options for avoiding financial ruin.
With credit card interest rates ranging from under 14 percent to more than 25 percent, you might wonder how long it would take to pay off a credit card making only the minimum payment. Investopedia points out that you would have to pay $200 a month for 11 years and five months to pay off a $5,000 balance at an 18.9 percent interest rate.
With that in mind, credit insurance and credit protection might seem like prudent options for avoiding financial ruin if you can’t make a payment or if your credit card is stolen.
Credit insurance, also known as payment protection insurance, is an optional insurance policy you can take out on a specific loan or credit card account. The policy will pay the balance or make payments for you if you are unable due to disability, death or job loss.
The average cost is about $1 for every $100 you owe, which is less than three percent of the balance owed for one card.
Credit card protection usually is free or low cost and covers everything from fraud to damaged purchases.
How Credit Insurance Works
Credit card companies often offer credit insurance for their particular card when you first sign up for the service. Coverage usually is offered for free for a specific time after which you are automatically enrolled and billed monthly unless you cancel.
There are four main types of credit insurance:
• Credit life insurance: Pays off your credit card if you die. You may not need this if you have enough life or disability insurance to pay off your debts. In addition, the monthly payments might cost more than a traditional life and/or disability policy. And, with a traditional life policy, your dependents would receive the remaining amount of the benefit after the debt is paid.
• Credit disability insurance: Makes your monthly minimum payment for a specified time if you become medically disabled.
• Involuntary unemployment credit insurance: Makes your minimum monthly payment on the current balance if you are laid off or downsized.
• Credit property insurance: This is not credit card insurance. Instead, it is used to insure the property you used as collateral to secure a loan. It may not be necessary if you already have home insurance or personal contents insurance.
It might seem best to get all four types of insurance, but make sure you’re not paying for coverage you don’t need. Also, read the fine print. Credit life insurance often comes with age restrictions, waiting periods and pre-existing condition exclusions.
How credit card protection works
The major types of free credit card protection include:
• Fraud protection: Federal law ensures that you will be protected if someone fraudulently purchases an item or service on your credit card. You cannot be held liable for more than $50 in unauthorized charges, plus you will not be responsible for any charges if you report the card stolen before charges are made.
• Purchase protection: For certain types of items, if you pay with your credit card and your purchase breaks or is stolen within 90 to 120 days, you can get it repaired, refunded or replaced.
• Price protection: Many major credit card companies will reimburse you for the difference between the price you paid for an item and a sale price you find within 60 to 90 days.
• Return protection: Some credit card companies will reimburse you if you try to return a new, working item to a store within 60 to 90 days of purchase and the merchant won’t take it back.
• Travel insurance: Credit card companies offer many different types of travel insurance, such as trip accident; trip delay/cancellation; baggage loss/delay; emergency evacuation; or emergency medical attention.
• Rental car insurance: Some credit card companies will reimburse you up to the cash value of the car for collision damage or theft for certain types of cars if it’s shown that you were not intoxicated or driving recklessly.
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