Credit Card Protection Plans Cost Lots, Offer Few Benefits

April 2, 2011— -- If you buy debt protection on your credit card, you're probably paying too much and getting little in return.

Those are the results of a recent study by the Government Accountability Office into debt protection products, which credit card companies advertise as a way to protect yourself from sudden tragedies such as unemployment or hospitalization.

Especially in the current economy, such protection may seem enticing, but it comes at a high price. Americans spent $2.4 billion on debt protection in 2009, but received only $518 million worth of benefits in return, the study found.

"I mean, that's crazy," says Gerri Detweiler, Credit.com's credit expert. "I think these products are overpriced and not very good."

The GAO studied the top nine credit card issuers, which control about 85 percent of the credit card market. These companies market debt protection extensively through direct mail, their websites and branches, and by email. The service is offered as a way to postpone or eliminate some or all of your credit card debt in times of emergency, including loss of a job or a disabling accident.

The fees for such protection are steep. The issuers charge between 85 cents and $1.35 per month for every $100 in card balance for debt protection. That adds up to $4.50 a month for a person with a $500 balance. The average person pays about $200 a year for the service, the GAO found.

But when tragedy strikes, good luck getting the benefits you've been paying for. Some policies won't reduce or eliminate credit card debt for hospitalizations or disabilities if the cardholder has a pre-existing condition. Others require complex applications to receive benefits.

"I've heard a lot of complaints from people who paid for these products and then, when they needed them, they couldn't get the benefits they thought they would get," Detweiler says. "There usually are a lot of hoops they have to jump through."

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