Do Cardholders Need Payment Protection and Credit Monitoring?

NEW YORK (LowCards.com) -- 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) will pay $214 million in fines and penalties. In July, Capital One (COF) 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.

Most cardholders would be better off financially by focusing on paying down their credit card balances. Instead of paying the monthly fee, add that amount to your monthly payment to pay down your balance faster.

Credit monitoring service
Credit monitoring services are provided by a variety of businesses, from credit card issuers to credit agencies. The service typically costs $13 to $15 per month, or $160 to $180 per year. This monthly fee covers daily credit report monitoring, sending alerts and fraud resolution insurance.

Consumers are typically better off saving that money and taking easy steps to monitor their own accounts.

Here are ways to protect your own credit:
  • A credit freeze is the best way to protect your credit score and prevent someone else from opening an account in your name. Only you can place a credit freeze or remove it.
  • Credit cards offer free protection against fraud. As soon as you discover the fraud, contact your credit card issuer. Once you report the loss or theft, you have no further responsibility for unauthorized charges. Your maximum liability under federal law is $50 per card.
  • Get free annual credit reports from the three major bureaus at AnnualCreditReport.com.
  • Check your credit card often to verify the charges and look for unauthorized activity.
  • Set up text alerts for account activity.

Some credit card issuers have ended their credit monitoring services, such as Chase ( JPM) Identity Protection.

Bill Hardekopf is chief executive of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

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