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Do Cardholders Need Payment Protection and Credit Monitoring?

NEW YORK ( -- The Consumer Financial Protection Bureau is punishing credit card issuers that misled cardholders into buying payment protection and credit monitoring services. Last week the bureau announced that Discover (DFS - Get Report) will pay $214 million in fines and penalties. In July, Capital One (COF - Get Report) agreed to pay $210 million for the same thing.

Banks push these services aggressively because they generate significant revenue. The bureau is doing what it can to protect consumers, but consumers must also protect themselves. Signing up for services you don't need or understand wastes money you can be using to pay down your balance and get out of debt.

What are these services, and do cardholders need them?

Payment protection
Credit protection plans can provide some insurance for life events such as unemployment or disability that may prevent you from making your loan payment. Debt protection products suspend or cancel all or part of a consumer's obligation to repay the outstanding balance on your credit card when a qualifying event occurs. These protection plans actually protect the lender from your inability to repay by making payments to the lender on your behalf.

Payment protection is not a benefit included with your credit card. The cardholder can choose protection by saying yes over the phone, or by filling out an online or paper application. The monthly fee is typically 85 cents to 99 cents for every $100 you owe.

Many cardholders buy this protection for peace of mind. In 2009, consumers paid about $2.4 billion on 24 million accounts for debt protection products, according to a study by the U.S. Government Accountability Office. But studying data from the nine largest credit card issuers showed cardholders got just 21 cents in tangible financial benefits for every dollar spent in debt protection product fees.

Payment plans are not the broad safety net they appear to be in promotions. Read the fine print to understand all of the restrictions and limitations. Know exactly what will be covered for you and how much you will get if you have to activate the protection. If you are already jobless or disabled, the protections won't cover you, for instance, and payment protections may not cover your whole balance.
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