We’ve all seen them. Those offers to cover us if we are sick, laid off or injured and unable to make our credit card payments. Over the years, for every one person that has told me they have received some payment or benefit from the program, there have probably been 500 more that have not.
The new Consumer Financial Protection Bureau is said to be looking into the benefits these payment protection programs really provide. My experience is “not much” but it will be enlightening to see what a serious investigation revels.
In the payment protection offers I’ve reviewed here on the site, the details have been a bit light leaving plenty of wiggle room for creditors to get out from really paying.
According to an article in the American Banker, these payment protection or credit insurance products that are pushed on consumers are huge money makers for the banks.
Some protection agreements require customers who have suffered debilitating injuries to prove they remain injured by submitting a new doctor’s note every month. Several plans dictate that any customer who files for benefits due to unemployment will immediately have his credit line frozen or reduced.
“I have yet to see [a plan] that made economic sense to the customer,” says Hakala, the expert witness. He argues that the products should be sold for closer to 29 cents to 39 cents for every $100 of debt for the benefits consumers receive; that’s close to what credit unions charge for similar products.
Despite the intense marketing and promotion these payment protection products receive, Kevin McKechnie, executive director of the American Bankers Insurance Association says, “A remedy for the consumer who feels he’s paying too much for something is to stop paying for it.” Well I suppose that’s a factual statement but it does not even begin to address the huge profit the credit card companies are making on these plans.
The top nine card issuers posted $1.3 billion in pretax profits on the plans in 2009, or more than half of the $2.4 billion collected in fees paid by enrolled borrowers, according to the GAO. Almost a quarter of the fees collected go towards the cost of marketing and administering the plans. The remaining 21% of fees, or about $518 million annually, are spent providing the plans’ actual benefits to consumers.
Currently, 24 million accounts, or roughly 7% of credit cards issued by the nine largest issuers, are enrolled in some form of payment protection, the Government Accountability Office estimated.
I would be entirely surprised if there was not a significant change in the way these payment protection products are promoted and sold to consumers following intervention by the Consumer Financial Protection bureau.