If you have a credit card, you've probably heard the pitch. It comes from a telemarketer, or perhaps from a mailer included with your statement, and warns that "life is unpredictable." Prepare for the worst, the pitch goes on to say, by purchasing a plan that will handle your credit card debt if you lose your job, become disabled or die.
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What it won't tell you is that for years, card issuers have been making fat profits off these payment protection programs while complaints from consumers and activists have piled up. But now, a slew of lawsuits and a federal investigation have put the plans themselves on an unpredictable course.
Hawaii in April 2012 filed a suit claiming that Bank of America, Barclays, Capital One, Chase, Citi, Discover and HSBC all billed cardholders for payment protection and other products that they didn't request or that didn't provide the promised benefits. The banks are accused of signing up consumers who thought they were simply requesting information, and of enrolling customers who don't qualify for the promised benefits.
The suit asserts that there is no easy way for customers to ask questions, file a claim or cancel the product. "Payment Protection is so confusing as to when coverage is triggered, so restricted in terms of the benefits it provides to subscribers, and processing claims is made so difficult by Defendants, that it is essentially worthless," states the lawsuit.
Hawaii joins several other states in suing banks over their payment protection plan marketing practices. West Virginia settled with Capital One for $13.5 million in January 2012 in a case involving credit card fees the state said were deceptive. The company admitted no wrongdoing in the settlement. Discover settled with Minnesota for $2 million last year and, according to a report it filed with the Securities and Exchange Commission, is being suied by West Virginia and investigated by Missouri over its marketing of payment protection plans. Hawaii is seeking up to $10,000 per violation from the credit card companies.
On top of the state actions, the Consumer Finance Protection Bureau (CFPB) and Federal Deposit Insurance Corp. are jointly investigating Discover for business practices surrounding payment protection plans and other products. Discover declined to comment for this story but said in its annual report that it made changes to its fee-based products and programs before the probe even began and that it "believes its current business practices substantially address the regulators' concerns."
Outside of the formal complaints, consumers and advocates voice dismay at how hard it is to get written details of payment protection plans before enrolling. A 2009 report by the Government Accountability Office found that seven of the nine largest card issuers refused to mail out information on the plans until the cardholder signed up.
Jim Wells calls it a "cart-before-the-horse" approach. A consultant in the financial services industry himself, he balked recently when a Bank of America telemarketer called offering payment protection. The sales person insisted that he sign up for a 30-day free trial before he could receive any written materials. "Whenever I hear these scenarios I assume in my perhaps cynical mind that the plan for the program is based on my forgetting to cancel by the end of the 30-day period," he says. "It's the same way stores do rebates instead of giving an in-store discount. They hope you'll get busy with other things."
Wells heads up Wellspring Consulting International, a Fort Lauderdale, Fla., consulting firm that provides access to alternative financial services for the underbanked population, which doesn't use traditional financial institutions. He says marketers prey on low-income people like those his business serves. "They're likely to have higher outstanding balances on their credit cards so they bubble to the top of telemarketers' lists on who to call," he explains. "They're also the most susceptible to the argument that says this is going to protect you should you lose your job."
High cost, low payout
Even if the banks clean up their marketing, they'll be hard-pressed to make fans among consumer advocates and financial planners. Critics say credit card debt protection plans are just a bad value. The programs charge customers between 85 cents and $1.67 per $100 of outstanding balance. That may not sound like much but it adds up. If you're paying $1 per $100 of debt, that's equivalent to adding 12% a year to your annual interest rate. On a $2,000 balance, that's $240 a year for the plan, plus whatever you pay in interest.
Because most plans cover only your minimum payment, you could end up paying out close to the maximum you'll ever receive. "There's a rule of thumb in insurance," says Ed Mierzwinski, consumer program director at the federation of state Public Interest Research Groups. "You certainly don't pay the same dollar for insurance that the insurance would pay you back."
The amount of benefits the plans pay out in relation to the premiums, known as the loss ratio, is very low. Consumer advocates advise shopping for products with a minimum loss ratio of 70%, and the loss ratio for group life insurance has historically exceeded 90% -- that is, 90 cents of every dollar consumers pay in, is returned in the form of premiums.
The 2009 Government Accountability Office survey found that the average loss ratio reported by the nine largest card issuers was just 21 cents to the dollar for their credit card debt protection plans. Birny Birnbaum, executive director of the Center for Economic Justice, says his own analysis shows the figure is closer to 10 cents per dollar. "They're wildly overpriced for the benefits provided and for some consumers they're quite costly," says Birnbaum, whose center advocates for the economic interests of minorities and low-income people. "You'd be better off just saving for a rainy day." (See "7 questions to ask before you buy credit card payment protection")
Part of the reason loss ratios are out of line with insurance is that the law does not classify these plans as insurance. While insurance rates are state regulated, debt protection plans, which are considered bank products, are overseen at the federal level by the Office of the Comptroller of the Currency. The OCC gives the banks free rein over pricing. Left unchecked by the government, prices tend to be high because there is no market competition. Consumers cannot shop around for different plans. The only option for a particular card is the program administered by that card's issuer.
Good deal, for banks
Complaints aside, the products are tremendously profitable for the industry. According to the GAO, in 2009 the nine largest issuers reported that they collected $2.4 billion in fees for debt protection products. 55% of that, or $1.3 billion, went to profit.
It's no wonder banks continue to pursue the business. More than half of all credit card mail offers include payment protection offers, according to data from Mintel Comperemedia, a company that provides direct marketing competitive intelligence. That rate has remained relatively steady, despite the lawsuits. Chase began reducing its payment protection marketing in March 2011, and included no mailers in the first quarter of this year. The bank agreed to pay $20 million in December 2010 to settle litigation against its plan. But Citibank's mailings doubled from 2010 to 2011, softening the impact of Chase's withdrawal. Those banks, as well as Bank of America, declined to comment for this story.
Industry representatives defend the plans, saying they work for a certain market segment. "In terms of the loss ratio, the question is, is the value of the product equal to the cost?" says Ken Clayton, executive vice president of legislative affairs for the American Bankers Association. "And for some people the answer is yes. People buy these products for a number of reasons. One is peace of mind. The other is knowing they will be protected if certain untimely life events happen that put them in a difficult position to repay their bills. And they're doing so for themselves, but they're also doing so for their family."
Some consumers benefit
Scott Cipinko, executive vice president and chief operating officer for the Consumer Credit Industry Association, says he does not subscribe to any debt protection products, but his sister had them in place when she became terminally ill a few years ago. An unmarried life insurance agent, she also had a term life policy but kept the debt protection so that her parents could use the life insurance benefits to settle her outstanding medical bills and funeral costs, rather than having that money go toward paying off credit cards.
"They're not for everyone," says Cipinko, whose association represents companies that underwrite credit card debt protection plans and other types of debt protection products. "But you should have the ability to purchase what you want. If you feel that buying an SUV is what you want, you're the one who's got to pay the insurance and the gas bills."
There is certainly a market for debt protection products. The GAO found that in 2009, consumers paid about $2.4 billion on 24 million accounts for them. 7% of the nine largest issuers' cardholders were covered. 70% of claims were accepted.
The agency acknowledges the products provide some benefits, namely that they can help protect a cardholder's credit score in certain circumstances and that they provide some consumers with peace of mind. According to the GAO's report, one issuer found that 80% of subscribers were satisfied with the product, and that figure rose to 90% among people who had received benefits from the programs. "People make a choice that the cost of the product is worth it for the peace of mind associated with that," says the ABA's Clayton. "If in fact they need it, it's a great value."
Making informed decisions
The Center for Economic Justice's Birnbaum would like to see the banks provide data so consumers can see before they sign up whether the products are a good value. "Right now consumers don't have any information about how often someone files a claim, they don't have any information about how often claims are denied," he says. "The CFPB can improve consumer disclosures to the point where consumers are actually empowered to make an informed decision." Birnbaum's organization and several others have supplied the bureau with a proposed plan disclosure form.