Credit card debt protection and credit insurance products can cancel or suspend part or all of a credit card debt for events, such as loss of life, involuntary unemployment, or disability. The U.S. Government Accountability Office (GAO) analyzed data received from three major credit insurers and the nine largest credit card issuers. The nine credit card issuers represented 85 percent of the credit card market.
The report found that consumers paid nearly $2.4 billion in 2009 for debt protection products. Debt protection products are mostly federally regulated, while credit insurance is an insurance product regulated by the states. The new Consumer Financial Protection Bureau will soon assume supervisory and enforcement authority for financial products, including credit card debt protection products.
The GAO found that debt protection products and credit insurance offers these advantages:
Help products a cardholder’s credit rating in times of financial distress
Can provide peace of mind
Are widely available
Easy to purchase
Disadvantage: High Fees
Regulators have reported relatively few consumer complaints related to debt protection products. However, fees for these products can be substantial, with the annual cost often exceeding 10 percent of the cardholder’s average monthly balance. Cardholders received 21 cents in tangible financial benefits for every dollar spent in debt protection product fees among the nine largest issuers in 2009.
The fees that major credit card issuers charge for debt protection products can be substantial. Fees for the primary debt protection product of the nine largest issuers ranged from $0.85 to $1.35 per month for every $100 in outstanding balance, with a median fee of $0.89. With this median fee, a cardholder would pay, on an annual basis, more than 10 percent of her average monthly balance in fees for the product. The average monthly fee paid for a debt protection product in 2009, among cardholders with a nonzero balance, was $16.49, and the median fee was $9.27. This equals about $200 annually in 2009 for debt protection products.
In general, the GAO found that credit unions charge significantly lower fees than banks for these products. Data provided by CUNA Mutual show that credit unions charged fees of between $0.30 and $0.67 per month per $100 in outstanding balance in 2010, with a median fee of $0.45--about half the median fee of $0.89 charged by the nine banks reviewed by the GAO. The credit union debt protection products were very similar, although not identical, to the products offered by banks, typically including coverage for loss of life and disability, often including coverage for involuntary unemployment, and sometimes including coverage for leave of absence.
The National Credit Union Administration (NCUA) estimated less than 5 percent of credit unions (fewer than 350) offered debt protection products on any type of loan, including credit cards in 2009.
Dace Marquis, Executive Director with NCUA, said that "credit unions do not have a significant share of the overall market for credit card debt protection products. However, we are pleased [the GAO] report notes the few credit unions electing to offer these types of products generally do so at rates comparatively favorable to consumers."
Read the full 52 page report from the U.S. Government Accountability Office.