American credit card holders are known for running up debt. Now they are also spending billions of dollars annually to make sure their monthly bill gets paid even if they lose their jobs or some other hardship strikes.
But a new government report shows that the price consumers pay for this debt protection may be too much for the benefits they receive.
The Government Accountability Office reports that consumers shelled out about $2.4 billion in 2009 to the nine largest credit card issuers for debt protection products. For every $1 cardholders paid in fees, they received 21 cents of benefits. Meanwhile, the card issuers earned 55 cents, before taxes, on every dollar of fees.
Debt protection products generally promise to suspend monthly minimum payments or cancel balances in the event of an illness, unemployment or the death of the cardholder. Fees are tied to the account balance and can amount to hundreds of dollars a year. At that price, consumers likely are better off paying down their balance or putting the money in an interest-bearing account that can be tapped in an emergency.
Monthly fees among the major players, according to the GAO, range from 85 cents to $1.35 for every $100 of debt. On a $5,000 balance, consumers could end up paying $510 to $810 a year.
The irony is that those with high card balances are more likely to be struggling financially. "Usually, the people who can afford the least will pay the most," said Curtis Arnold, founder of the card-comparison site CardRatings.com.
The GAO recommends that the new Consumer Financial Protection Bureau educate consumers about debt protection products and look into the cost and benefits to the cardholder.
Credit card issuers have pitched this protection for decades.
Early on, they offered credit insurance through an insurance company. States oversee this insurance so the regulations -- including caps on premiums -- can vary across the country.
But in the past decade, card issuers started offering their own debt protection products that come under federal oversight. While that means the regulations are the same across all states, federal regulators don't address the cost of the products to consumers, the GAO says. Some consumer advocates say card issuers raised fees once they were no longer restricted by state insurance regulations.
Credit insurance and debt protection products can safeguard credit ratings when consumers go through tough times, and consumers have lodged few complaints, the GAO notes. Moreover, 70 percent of benefit claims were paid in 2009, according to the GAO study. (However, nearly one in four claims were denied, often because consumers didn't provide documentation of their hardship.)
The American Bankers Association and its affiliate, the American Bankers Insurance Association, released a joint statement saying it's difficult to measure the peace of mind that debt-protection products provide.
"Ultimately, customers are in the best position to determine the utility of the products for their personal financial decisions," the groups said.
But customers are not in a position to easily make that determination before they sign up. The GAO says it called the nine credit card issuers to get a copy of the terms and conditions -- and seven of them said they wouldn't disclose that information until a consumer was enrolled in the product.
"It's a hard product to evaluate," said Birny Birnbaum, executive director for the Center for Economic Justice, an advocacy group. "Consumers have a hard time understanding."
Cardholders could be ineligible for the benefit and not realize it. For example, they could be disqualified for the protection even after losing a job if they worked only part time, the GAO says.
Instead of buying debt protection, consumers have other options. If you lose a job or suffer some other financial hardship, contact the card company to work out a payment plan, said Arnold of CardRatings.com.
Some consumers might be tempted to buy debt protection because they worry about dying and leaving loved ones stuck with their credit card debt. But survivors won't be held accountable for the debt unless their names are on the account, too, says Jeff Gonya, a Baltimore estate planning lawyer.
Gonya suggests that if people are worried about leaving behind bills, they should buy life insurance that will cover more than just a credit card debt.