Credit Card Protection

As if they don't already make enough money from us, credit card companies also sneakily snack on our cash another way. It's all about the innocuous looking box on the application that says 'tick here' to be protected.

Here's how to find the cheapest way to insure your credit card repayments (provided you need to in the first place); slashing the cost and repaying your debt in half the time.

• What is PPI?
• A Cheaper Way
• When Not to Switch
• The Saving
• How Does it Impact Benefits?

Dont get confused.....

In this article, I'm discussing Credit Card Protection Plans, which make repayments for you if you become unable to work. These are totally distinct from Cardguard schemes – programs to help you quickly cancel cards if they are lost or stolen. That's maybe one for another time…

What is PPI?

Credit card Payment Protection Insurance (PPI) policies will make card repayments for you if you have an accident, get sick, or lose your job. It's quite possible you're already paying for this cover without being aware of it – do check, as often it's expensive and unnecessary with a host of pitfalls. If you find out that you are see the PPI Reclaiming article.

• The pay-out period is limited. PPI doesn't pay out continuously. Most policies simply foot the bill for a year. However, because of the way they are structured, all of your existing debts (and interest earned on that debt) should be cleared during this time.

• A Disguised Cost. PPI usually costs 70-80p per £100 of outstanding balance on the card. This is a sassy bit of pricing, as it's only when the bill's big that the PPI cost is material, yet it's disguised by the other big charges.

  Worse still, for anyone using a direct debit to pay of the bill in full each month the PPI is often pointless, as by the time you claim, the DD would've paid the bill anyway.

• Will it even pay out? Credit card companies' chutzpah sometimes has to be admired. They usually take no account of people's status. Self-employed customers will often pay for the ‘unemployment' element of policies, even though it rarely actually covers them. It this applies to you check the PPI Reclaiming article to see if you can reclaim the cost of your insurance.

WARNING! Don't go on a spending spree!

Even though - during a claim period - the protection policy makes payments for you, this doesn't mean you can go wild without ending up paying for it. Card usage during the claim period is not covered; protection policies make their payments based on the amount owed at the time the claim is made.

This makes sense; as if you are making a claim you're probably not in a position to be spending loads anyway. However, with my two alternative solutions below, it's possible to over-insure yourself (cheaply) by just a little, in order to cover any essential purchases you may have to make while claiming (although this may have Income Support implications)

There's a cheaper way

On top of all this, credit card PPI is still an expensive product.

Do you need it at all?

It's worth assessing whether it's necessary at all; if you've other means to meet the bills for a year in case of a problem - savings, family help, a general income replacement policies, work-based insurance – you'll be much better off putting the money towards repayments.

How to get yourself protected, cheaply.

A new standalone policy aimed specifically at credit card protection is available. Paymentcare's* credit card PPI costs 65p per £100 of your outstanding balance – and up to £5,000 can be covered. This should be a saving over your credit card's own cover.

Claim with Paymentcare and you'll receive up to ten, each equal to 10% of the original outstanding balance. Paymentcare won't charge you payments during the months you're claiming the benefit - whereas with most lenders' protection you continue to have to make payments during the claim period.

Be careful

Here the onus is on you to ensure you remain adequately covered. You pick the level of cover you want (between £1,000 and £5,000) and then you're charged the appropriate amount. Yet, that is the maximum the payout will cover, so you must take into account any interest payable during the 10 months of the claim, and also keep an eye on your outstanding balance and increase your cover level if necessary.

Paymentcare pays the insurance money diectly to cusomer, so if you do end up over-covered it'll pay out the full amount you're covered for (if you claim for ten months or over), even if that is greater than your credit card debt, meaning you could get more than you need. Though there is the chance that this will impact any benefit claim you may make – see Technical Note.

Advanced MoneySaver's Note: Further savings for the young 'uns

If you're under 35, even greater savings may be available, by using a standalone payment protection insurance provider, which are designed to cover loans. Beware though, this method is more complicated and less flexible than Paymentcare.

Here the monthly repayment, not the outstanding balance, is the amount covered - meaning you will receive a fixed payout each month. Therefore you need to monitor it carefully to ensure it'll cover the debts. However those under 30 especially can make savings this way and if you're financially savvy should consider it.

For the current cheapest policies, see the Loan Insurance article.

When Not to Switch

Policy claims are usually invalid if you knew you were going to be ill or there was an imminent or obvious threat of redundancy when you took out the policy. So if this is the case, stick with your existing card's cover.

In the current economic climes it’s sensible for everyone to take a moment to think how they’d be impacted by redundancy though; and if possible put a contingency plan in place. See the full Redundacy Guide for hints and tips.

It's also worth noting that if you claim means tested benefits, like Income Support, credit card PPI is for a specific debt repayment so it's automatically discounted as income, and won't impact benefits.

Yet for this to happen with income replacement policies it's necessary to demonstrate they were taken out specifically to meet the debts, though that shouldn't prove too difficult (see Technical Note at the end for full details on this).

The Saving

For someone with a £3,000 debt on a card, HSBC charges just under £24 a month for the PPI, (roughly average) yet the equivalent Paymentcare policy charges £20.50 (once you take interest into account).

Plus, if the policy had to pay out, Paymentcare would pay off the main balance within 10 months, while HSBCs protection plan would take 12 months. In addition, Paymentcare's premium refund policy means that during the claim, you'd save £284 over HSBC – and at the time you need it most too.

Advanced MoneySavers' Note: The impact of different policies on income support

It's not necessary to read this section. However, I thought for the sake of thoroughness I would add it, to save those who want to delve further from doing their own research. First the law:

Income Support (General) Regulations 1987 Schedule 9 paragraph 30ZA:

Income Support is intended to help people whose resources are insufficient to meet their day-to-day living expenses, so any income available to meet those expenses is normally taken fully into account when working out how much benefit can be paid.

Insurance payments, which provide income when a person becomes unemployed or sick are taken into account when determining entitlement to Income Support, as they are available to meet the person's day-to-day living costs.

However, the exception to this is when the insurance policy is intended to meet certain debts. In this case, the payments are disregarded, provided they are used for their intended purpose, regardless of the payment arrangements – whether paid to the benefit claimant or to the creditor.

For example payments from policies intended to cover credit card debts, or bank loans, or to meet hire purchase payments are ignored provided they are used as intended. Anything over and above the amount of the payment due on the debt or loan is taken into account, as it available to meet daily living costs.

OK. So that's as clear as mud.

Now onto the info from the Department of Work & Pensions after I nagged it for guidance on this. It said the following

"The terms of the policy – including exactly what it will cover - are set out by the insurance company, so people will be fully aware of what their policy covers in relation to their own credit cards, loans etc. If they do need to make a claim for Income Support and their insurance policy starts to pay out, they should bring the terms and conditions of the policy, along with evidence of their credit card bill, debts etc, to the interview and it is likely that they will be given a disregard. Likewise with a specific policy, we would need to see evidence of the terms and conditions and the bill etc."

Effectively what this all means is you've no guarantees but it's highly likely any Income Protection payments will be disregarded and the more proof you have the better (worth stating in any correspondence with the insurer that it is specifically to pay off your credit card bills). However, what this does mean is that any insurance payments made in excess of the outstanding debt are not disregarded. If you overinsure yourself, either with Paymentcare or one of the Loan PPI policies, if any of the money goes towards things other than your debts, your income support could well be affected.