Avoid Paying too much credit card protection rackets.
THE SUNDAY EXPRESS - 25TH APRIL 2004
Money-saving expert Martin Lewis finds a way through the maze of expensive cover
As if they don’t already make enough money from us on interest rates, credit card firms cash in on customers in another way. There’s an innocuous-looking box on most credit card application forms: tick it and you end up paying through the nose for payment protection insurance.
It doesn’t have to be this way. This week’s deal is the cheapest way to insure your credit card repayments – you can more than halve the cost of what can prove to be valuable cover.
Credit car payment protection insurance kicks in if you have an accident, get sick, or lose your job and are out of pocket as a result. It will make card repayments for you and the cover can be useful – but it can also be expensive and riddled with a host of pitfalls.
For one, the pay-out period is limited. Most policies foot the bill for a year. Then, the cover won’t pay off your debts. Most Payment Protection Insurance policies simply promise to repay 10 per cent of the outstanding debt on the card each month.
This may seem a good deal because it looks as if your debts would be repaid after 10 months. In practice, it doesn’t work this way.
For someone with a £1,000 balance, for example, the 10 per cent protection provides for a £100 repayment in month one, but this falls to £90 in month two – 10 per cent of the £900 debt remaining – and so on. After 10 months there would still be a £360 debt and, after a year when the payouts end, you would still be left with £290 of debt.
Payment protection insurance costs 70p to 80p for each £100 of outstanding balance on the card. This is a sassy bit of pricing – when the cost of payment protection is high, it is disguised by the other big charges. Worse still, anyone using a direct debit to pay their bill in full each month will find the direct debit has paid the bill by the time they claim.
The other hitch is this insurance is not suitable for everyone. Credit card firms usually take no account of people’s status – for example, the self-employed pay for the unemployment element of insurance even though it rarely covers them.
The good news is there is a cheaper way to arrange cover. First, though, it is worth assessing whether you need it.
If you have other means to meet the bills for a year in the event of a problem, such as savings, family help, other income replacement policies or work based insurance, you will be much better off putting the money towards repayments.
However, if you do think protection is important, a standalone income replacement policy is always a better alternative. The cost depends on the amount of monthly repayment covered, with the cheapest policies costing about £4 for each £1,000.
This works out cheaper but, because the payout is fixed, you must monitor it to ensure your debts are covered.
Another advantage of standalone insurance is you can choose to buy accident and sickness cover alone, or with unemployment cover thrown in.
Two companies vie to be the cheapest. Payprotect has two levels of cover: With the cheaper one you must wait 60 days before it starts paying out. For a little more the wait is usually 30 days which is generally a better move. The cost is age-related, so it is usually cheapest for anyone under 45. The alternative is Burgesses, which is cheaper for anyone over 45 and starts paying from day one.
A word of warning: be careful about switching to a new insurer. Policy claims are usually invalid if you knew you were going to be ill – if you have pre-existing medical conditions, for example – or if there was an imminent or obvious threat of redundancy when you took out the policy. If this is the case, stick with your existing cover.
It is also worth noting if you claim means-tested state benefits such as Income-Support, credit card payment protection insurance does not count as income so it won’t affect your benefits. Income replacement policies, on the other hand, may do so.
These issues aside, however, the savings available are huge. For a credit card borrower with a £3,000 debt, HSBC would charge just under £24 a month for Payment Protection Insurance and that’s about average.
The equivalent Payprotect policy charges £10.50 and if you claim on the policy, the income payment protection pays out a flat £300 a month, whereas HSBC would pay just 10 per cent of the outstanding balance. After 10 months the credit card policy would have paid out £2,070 compared with £2,700 from Payprotect.
