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By: Ikedi Ani-okoye

Credit protection indemnity is a adept example of a consumer rip-off that affects millions of people, yet receives little attention in the financial media. Simply stated, you should NEVER purchase "credit protection insurance," or a "payment protection plan" or any other similar type of credit-related insurance. Let's take a look at how these programs work and why they are a bad deal for the mediocre consumer.

First, let's dispense with the scam version of this indemnity. With identity theft in the news so much lately, con artists have set up telemarketing boiler rooms to call people and try to scare them into buying worthless credit insurance products. Representatives will try to convince you that you're at risk if someone gets hold of your card and starts making fraudulent purchases in your name. If they call, they may even pretend to be from the "security department" of your bank. In fact, they may actually be part of an identify theft ring, with the goal of getting you to disclose personal info over the phone. Or they may simply be trying to make a fast buck through merchandising you an insurance policy that you absolutely don't need.

Under Federal law, you are limited to a max of $50 liability for unauthorized use of your credit card. If you didn't authorize a charge, don't pay it! Follow your credit card bank's procedure for disputing bogus charges. You simply don't want insurance to protect yourself from a situation that is already covered through Federal law!

Now, what about those "payment protection plans" offered directly through the big credit card banks? These are plans that promise to cover your minimum monthly payments for a tendered period of time (usually 12-24 months) when you get placed off from your job, become hospitalized due to an accident or illness, or become disabled. On the surface, a plan like this sounds like a pretty adept idea. After all, how could you keep up with your payments when you suddenly lost your job or became too ill to work?

Of course, you should not be carrying balances on your credit cards anyway. if everyone paid their balances in full every month, then credit protection indemnity would not even exist in its current form. You are charged for the indemnity based on the amount of debt you're carrying on the card, so when the balance is zero, then there is no fee. In fact, some bank representatives use this as part of the sales pitch when trying to entice individuals to sign up for that "free 3-month trial" on their payment protection plan! They attempt to talk you into adding the insurance now, although you don't want it and whenever there is no cost, in the want that one day you will start carrying a balance. by then, you'll probably have forgotten you signed up, and you'll wonder what those mysterious charges are on your statement every month.

If you do carry balances on your cards, credit protection indemnity is still a very bad deal. To see why, let's look at the math here. A typical loss protection plan costs 85 cents for every $100 of balance carried on the card. So when you're carrying a debt of $5,000 on the credit card, it will cost you $42.50 per month to buy the indemnity. Over the course of 12 months, you will spend $510 under this scenario. That's equivalent to paying an excess 10% in annual interest!

A light bulb should be shining over your head correctly about now. Why not take that same $42.50 per month and use it to pay down the balance faster? Adept question, when you consider that most users who have credit protection carry it year after year, without ever becoming eligible for a claim against the indemnity policy, the amount of wasted money can add up to a truly staggering sum.

Continuing with our $5,000 example, with a distinctive minimum defrayment of $125/month, it will take more than 26 years to pay off the balance in full, at a price of $7,115.42 in interest. Through applying that additional $42.50 per month that would otherwise go toward the insurance, for a total monthly defrayment of $167.50, you'll have the debt paid off in only 40 months! And you'll have saved $5,435.22 in interest charges. It simply makes no sense to waste this money, especially when you consider that the credit protection plan is normally only good for 12-24 months anyway.

There's another significant factor involved here. Credit protection is also a bad deal because the eligibility prerequisites are so very restrictive. Whenever you read the fine print, you'll realize that there are all sorts of situations that are not covered. Let's say, for example, that you've been fighting a medical condition for some time. So you buy the indemnity thinking it is an adept idea. Eventually, you end up in the hospital for treatment and recovery. Can you breathe a little easier knowing your credit card payments are covered? Nope.

Most of these policies have exclusions for pre-existing conditions. And there are numerous other loopholes that permit the bank to deny your claim under the policy. In view of the lousy math and the restrictive nature of this type of insurance, these programs should really be named "bank profit protection" instead of "credit protection insurance." Instead of spending good money on an insurance plan that you will believably never use, you're far better off applying that same amount toward paying off the debt early.