Give credit card insurance a miss
Sign up for credit card repayment insurance and you might think you’ll be helped out of the red should you get sick, become disabled or lose your job.
But if one of those unfortunate circumstances eventuate and your credit card is still showing the signs of a few good spend-ups, you’ll probably have another nasty surprise in store.
The payout under credit card insurance policies can be underwhelming.
If you’re made redundant or are temporarily disabled, the amount paid is typically capped at 10 to 15 per cent of your card debt. Repayments stop after a period, usually between six and 24 months – it could be earlier if the policy’s maximum cover limit is reached. If you have outstanding debt after that, it’s your problem.
Card repayment policies also limit cover if you’re in part-time or casual work, or self-employed: depending on the policy, you may not qualify for redundancy or disability cover in these situations.
You’re also unlikely to be covered for these eventualities once you hit age 65.
Among the major banks, the cost of the policies ranges from 75c to 79c for every $100 you owe on your credit card.
That might not sound like much but over a year, it can add up to hundreds. On an average monthly balance of $3300, you’ll pay premiums of $293 to $313 each year.
If you take out a repayment policy on finance store cards Gem Visa or One Card Visa costs are higher: you’ll pay $1 per $100 of debt.
Lenders selling credit insurance are expected to make sure the product meets the customer’s needs and premiums won’t cause financial hardship. But given the significant limitations of this insurance, it’s unlikely to be the best choice for most consumers.
Of the major banks, ASB and Westpac said less than 10 per cent of cardholders take it out. The others didn’t provide figures,
If you’ve got other insurance policies, you may already be covered.
claiming the information was commercially sensitive. With monthly personal credit card balances standing at $6.1 billion, even if only a small percentage sign up, the sum paid for cover could run into millions.
If you want to make sure your credit card bills are covered if something dire happens, there are alternatives to card repayment insurance.
Your best option is paying off your card balance each month and avoiding the sky-high interest rates charged on credit cards. If you have any spare funds, put them into an interest-bearing savings account as an emergency fund.
If you’ve got other insurance policies, such as life or income protection, you may already be covered.
As well as cover for death, some life insurance policies payout for terminal illness.
If you’re struggling to make card repayments, talk to your provider. They’re obliged to act responsibly. If you’re suffering hardship, you can apply for relief.
For more information on credit card repayment insurance, as well as thousands of independent test results and research on a range of products and services, visit consumer.org.nz.