Facts About Consumer Credit Insurance

What is Credit Insurance?

Credit insurance assures a loan will be repaid in the event of the death, disability or involuntary unemployment of the insured borrower. It can be taken to protect all types of consumer borrowing, including loans to finance or refinance a home. These products may be sold by credit card companies, auto dealers, finance companies, department stores, furniture stores or wherever loans are made and credit extended for the purchase of personal property.

There are five principal types of credit insurance:

1. Credit Life Insurance insures that a borrower’s insured debt will be repaid if the insured borrower dies during the term of the coverage.

2. Credit Accident and Health Insurance, also known as Credit Disability Insurance, pays a limited number of monthly payments on a specific loan or credit card account if the borrower becomes disabled during the term of coverage.

3. Credit Involuntary Unemployment Insurance pays a limited number of monthly payments on a specific loan or credit card account if the borrower becomes involuntarily unemployed during the term of the coverage.

4. Credit Property Insurance pays to repair or replace personal property purchased with the loan or credit proceeds and/or serves as collateral for the credit if the property is lost, damaged or stolen. Unlike the first three credit insurance products, credit property insurance is not directly related to an event affecting a consumer’s ability to pay his/her debt.

5. Credit Card (Fraudulent Use) Insurance simply stated is protection against unauthorized use of your credit card in the event that your card is lost or stolen.

Benefits of Credit Insurance

• Credit insurance is affordable because it is based on group rates. This means that generally all consumers or borrowers who voluntarily select credit insurance pay the same rate in their state.

• The cost of Credit Life Insurance for middle aged and older consumers is generally less than term life insurance.

• Credit insurance is generally offered and written with few, if any, underwriting conditions that apply to other types of insurance.

• Consumers can generally obtain credit insurance, including credit life insurance, without the need to fill out a medical history, take a medical examination, or disclose if they are smokers.

• Federal and state laws require that consumers be told credit insurance is a choice and is not required to obtain a loan. Credit insurance is always optional.

• Consumers can get a “free look” at credit insurance by getting a full refund within a set period that usually ranges from 10-30 days. Consumers can cancel the trial at any time before the set time period and receive a prorated refund of any premiums paid.

• State laws and regulations establish credit insurance rates, which have been adjusted and regulated to protect consumers in a majority of states within the past five years.

• Credit Life and Disability Insurance rates do not rise as an individual ages. There is one rate for everyone, regardless of age or medical condition.

Do You Need This Insurance? Let us look at Credit Disability Insurance and Credit Involuntary Unemployment Insurance. Remember, these insurance plans will pay your credit card bills if you become disabled or you lose your job. These plans may be a good thing if your potential sources of income would not be enough to pay your monthly debts in the event of your disability or unemployment. However, there may be a waiting period before you receive your first benefit payment and the insurance may only pay the MINIMUM card payment each month (up to the policy coverage limit). Consequently, unless you are disabled or out of work for a very long time, the cost of the premiums could easily exceed any monthly benefits.

Likewise, insurance that will pay off card balances in the event of your death make sense only if you have a lot of credit card debt and little or no other life insurance. You might be better off insuring yourself against income loss or death by purchasing regular disability or life insurance instead of credit insurance.

Credit Property Insurance guarantees the purchased item or property value of the loan amount. For example, if you used an item that is collateral for a loan and that item was damaged, then its value as collateral may now be worthless but your obligation for the full loan amount has not changed. That is why the lender may require this insurance in order to guarantee the collateral against the loan.

Some telemarketers are aggressively selling insurance that covers the fraudulent use of your credit card. Do you really need that kind of credit card insurance? Most experts say no. Remember, Federal Law already limits your liability to the first $50 of fraud losses per account, provided you make a reasonable effort to notify the card issuer of any lost or stolen cards within a reasonable period of time. In many cases, the issuer will waive the $50 requirement. If your card issuer insists on the $50 payment, then check with the company that insures your home because your existing homeowner’s policy may cover the loss. If you are considering credit card insurance, ask yourself these questions:

• Why do you want this type of protection?

• What benefits will you gain from it and how much are you willing to pay?

Finally, make sure you are dealing with a legitimate insurance company. If you have doubts about the policy or the company, contact your state government insurance commissioner or office of consumer affairs. Never give your credit card number and information to anyone selling credit card loss protection over the telephone because you may be dealing with a con artist who could make unauthorized charges to your card.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email contact@dmcconline.org. DMCC is located at 3310 N. Federal Highway, Lighthouse Point, FL 33064.

 


Credit Card Balance Transfers, the Pros and Cons

Most people with credit cards know the term balance transfer. They may have even been enticed by an offer in the mail. To those with an enormous amount of debt, it may seem counter-intuitive to get another credit card. But in the slowing economy, balance transfers can lower monthly expenses and play an important role in personal budget management.   A balance transfer literally transfers the balance from one credit card to another one with better terms and low or zero interest rates. It can assuage post-holiday-spending hangovers, help you make large purchases, combat high interest rates (especially on rewards cards), or relieve you when intro rates on current cards expire.  It can be a smart way to buy time-for a limited period of usually 6 to 12 months-where you can avoid finance charges and make payments to the principal balance.

Why it’s offered

It’s in the interest of credit card companies to offer balance transfer deals. They want to lure new customers with good credit who’ll stay for at least four years. They also want to keep pace with the increasingly competitive credit industry. They do this by offering teaser rates (0% or low intro rates for the balance transfer for a limited time) and low fixed rates (for the life of the transferred balance).

However, given that most people won’t pay off their balances before intro rates expire, they stand to make money from interest. They also charge different (higher) rates for new purchases made on the card with no grace period.

Who qualifies

For a new credit card and ideal intro rates, you need good credit. Just applying for the offer doesn’t guarantee you’ll lock in intro rates, especially if your credit is bad. If it is, and they still grant you a card, you’ll have higher interest rates and it won’t be worth it. For tips on repairing and building credit read Building Credit While You’re Young.

The Transfer

After you have applied for a Balance Transfer card and received it in the mail, read the card-member agreement that comes with it.  If you have qualified for the 0% balance transfer rate, call your new card issuer to request the transfer. Some issuers will mail you convenience checks — just make sure they are for balance transfers not cash advances. Continue making minimum payments on your old card since it can take four weeks for the transfer to complete.

What to Watch Out For

Hidden Fees: Most charge a transfer fee, usually 3% of the transfer amount. Aim for one that caps the amount at $50 to $75, or else a large balance transfer could cost a few hundred dollars. Avoid cards that charge a membership or annual fee.

Transfer rates versus purchase rates: Some offer 0% APR on balance transfers but not new purchases. Right now, a number of banks are offering 0% APR on new purchases as well, so make sure you’re getting the best deal possible.

Tricky payments: Payments are often applied to the transferred balance first because it has lower rates. The balance transfer must be paid before payments are applied to new purchases. For example, if you transfer $5,000 and then charge $50, all payments will go towards the $5,000 until it’s paid. Meanwhile, the $50 accumulates interest because most balance transfer cards don’t offer grace periods for new purchases.

Ways to Save

Shop around: Compare the fees, APRs and payment policies of several cards. And be realistic about how quickly you’ll be paying down your debt. If you won’t have the balance paid before intro rates expire, find a card with the best overall rates and fees.

Pay more than minimum: Pay the principal balance before intro rates expire so you won’t have to pay interest. If you can’t pay down the full balance, at least pay more than the minimum. Once the standard rates kicks in, just making minimum payments extends the debt’s life for years.

Personal Budget Management: Always make (at least) the minimum payment and pay on time. If you miss payments, you’ll end up with unreasonably high rates and late fees. Set up automatic bill pay if you’re forgetful.

Maintain clean credit: Some credit card companies routinely check your credit reports and raise interest rates if your profile changes for the worse. Make sure you keep a clean credit history.

Think long term: Don’t think that serial balance transfers are a way to avoid paying off your debt. Sooner or later you’ll have to pay it off. Consider them a potentially smart, near-term way to reduce the cost of carrying the debt you have and help you get back into the black sooner.

DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt.  Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email contact@dmcconline.org. DMCC is located at 3310 N. Federal Highway, Lighthouse Point, FL 33064.

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Reference: http://www.mint.com/blog/saving/debt-planning-credit-card-balance-transfers-pros-cons-and-caveats/