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Buying protection from debt on cards

It's a credit card service that might catch your eye. If you lose your job or fall into other financial hardship, you can cancel or defer payments in exchange for a monthly fee. But a new government report finds that consumers pay high fees for these "debt protection" services while reaping limited benefits.

* How It Works. At Bank of America, for example, cardholders who want to enroll in debt protection pay a monthly fee of 95 cents for every $100 of their balance.

Customers can cancel payments under certain circumstances, including involuntary job loss, hospitalization and the arrival of a new baby. The number of cancellations permitted varies depending on the situation. For example, cardholders can cancel up to 18 payments if they're laid off.

Only the minimum payment due for that month is waived.

* The Details. A report from the Government Accountability Office found that the top nine card issuers collected $2.4 billion in fees for debt protection products in 2009, but paid out just $518 million.

That gap allowed banks to pocket $1.3 billion in pretax earnings. Banks told the GAO that debt protection can generate more profits because there are no price controls.

The GAO acknowledged that the products can help consumers during times of financial distress. But it said consumers often fail to understand how much they are paying or how much coverage they enjoy.

* Background. Credit card issuers have stepped up marketing of debt protection in recent years through recorded messages on customer-service hotlines, direct mail, e-mail and telemarketing.

In a response to the report, the newly created Consumer Financial Protection Bureau said it will explore ways to improve disclosures about the costs and benefits of the service.

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