by Rosemari Trites

Created on: February 12, 2009

Every credit card offer I have ever seen has offered its customers insurance, to protect your credit, they say. But, exactly how does this work, and what is the downside? Certainly protecting your credit standing is important to all people. When it comes to credit insurance, it is definitely good to ask questions, and read the fine print.

First off, let's look at how the insurance product works. As a credit card customer, you are normally charged a small monthly percentage on the balance on your card at the end of the billing cycle. Therefore, if your balance is $0, there is no charge. For this small fee, the amount you carry forward into the next billing cycle is protected should you become temporarily or permanently disabled. There are good and bad points to look at to determine if it is right for you to have this insurance.

PROS

On the up side, if you are unsure of your future and you carry a large enough balance on your card that monthly payments would be a burden to your financial situation, by all means carry the insurance. What will happen is the insurance will pay the monthly minimum due on the insured amount on your card. This means that your credit standing will not be blemished by late payments during a financially difficult time. This can help you get on your feet faster once the financial strain subsides as your credit standing on this particular account will remain intact, giving you a decent credit reference.

Also, if you are injured and unable to work for more than 30 days, the minimum payment on the insured amount will be covered for you. The last thing you need while laying in hospital or at home in recovery, is a growing stack of unpaid bills and the worry that comes with it could actually hinder your recovery.

CONS

Notice in the examples above, I clearly stated"insured amount" when referring to what payments will cover. What most plans state in the fine print is that none of the "new" charges on your account will be factored into the minimum payment made. This will remain the responsibility of the customer. For example, at the end of your billing cycle you pay your insurance on the balance carrying forward. This is insured. Only the minimum payment due on this amount from last month will be paid. You will be billed for the rest. During a claim period, your finances are strained and the temptation arises to charge items on your card as opposed to cutting back on expenses. This is dangerous as you will be responsible to pay on the new charges.

Also in the fine print are the exclusions to coverage. Pay very close attention. If your condition is previously existing, you are not covered. This means your claim will be denied if you are off work due to the back injury you sustained two years ago before you started to pay for coverage.

If you are self employed or a business owner, you are not covered at all. There is also an age exclusion, some plans cut you off at 70, some are earlier. It is a good idea to ask about these exclusions prior to signing up to a plan.

Now that you know a little more about how these types of plans work, you will be better equipped to make a decision regarding the plan offered by your credit card company. Keep in mind that different card companies offer different plans and it is best to get all the information you need to determine whether the product will benefit your situation.

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