Just say no: 3 unnecessary credit card benefits
November 4, 2011
By: Geoff Williams
If you buy a bag of corn chips at the grocery, you're probably also getting a container of salsa. If you purchase an iPod, you'll probably want earbuds with it or some apps. Some products, like digital cameras (batteries) and reading lamps (light bulbs), virtually demand that you purchase an add-on.
It's a longer leap of logic when it comes to credit cards and all of the related services that are out there. Some of these services promise to assist with your credit cards if you lose your job, your health or even your wallet.
It isn't that they don't work together well. It's that even if they work exactly as promised, it's questionable that the service is even needed. These benefits are benefits, all right, but they "primarily protect the credit card company," says Rick Scott, assistant professor of finance at the Donald R. Tapia School of Business at Saint Leo University in Saint Leo, Fla.
Here are three common credit card-related products and services that you can pay extra for, but you really, really don't need to.
Credit card insurance
The cost: Approximately $8.50/month for every $1,000 of debt
The pitch: If you lose your job, who will pay your credit card debt? Credit card insurance will. If you have a medical crisis and are laid up in the hospital for a few months, don't worry! Insurance will make your monthly payments for you.
The reality: The fine print means you may not get the benefit you think you're paying for. In fact, you may wind up deeper in debt, with the inability to use your card.
"They usually only pay the minimum payment due each month, with interest continuing to be assessed and added to your balance," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. She adds that if you have more than one credit card, and you want to be fully protected, you would have to buy insurance for each card, which could really get pricey.
And, frequently, these plans won't let you use your credit card while you're unemployed or hospitalized and not making payments--a time when you may feel you need your credit card more than ever.
"These tend to be high profit-margin items for the banks and credit card companies, which is why they're pitching them," says Eric Tyson, author of "Personal Finance for Dummies." "But that's ultimately not the reason they're not a good deal. There are far less costly ways to accomplish the same thing."
What to do instead: Sock away that money you were going to spend on credit card insurance in a savings account, or perhaps, says Cunningham, disability or life insurance. And if you're really that afraid you're going to lose your job, or wind up in a hospital, maybe you should look for a better job or get a physical. True, capable people are fired from good jobs, and healthy people occasionally get hit by a bus. But these credit card products are based on one thing, says Tyson: "Fear and anxiety."
Credit card identity theft protection
The cost: Around $15/month
The pitch: Your credit cards could be stolen. Identity theft is running rampant. Even though there were 3 million fewer identity theft cases last year than the previous year, 8.1 million adults in the United States still became identity theft victims, to the tune of $37 billion. Paying for identity theft protection means that you have somebody looking out for you.
The reality: Yes, credit cards are sometimes stolen. It can be a hassle to deal with the aftermath, and there are some real horror stories out there. But let's look at what typical ID theft programs promise you. They'll monitor your credit cards and alert you when there are suspicious purchases. They'll pay for lost wages and legal expenses that you may incur as you fight to prove that you didn't make some strange purchase. But they won't cover you for unauthorized charges. They don't have to. The bank issuing your credit card is on the hook for that money, not you. Federal law mandates that the most you can lose from a credit card theft--as long as you report it--is $50.
What to do instead: Scrutinize your credit card statements every month. If you are worried that someone might be ripping you off, then go to the credit card's website every week or day if you have to and make sure nothing is amiss. Remember, you're worried about losing money, right? Well, consider whether the monthly cost is worth paying for something you can easily do yourself.
As Tyson notes, "You can't just look at the one-year cost of these plans. If you sign up, and you do it year after year, for 10 to 20 years, that's a lot of money you're wasting on these plans."
Real-time credit report updates
The cost: Around $14.99/month
The pitch: In this 24/7 day and age in which life moves fast, and the action on your credit and debit cards moves even faster, how can you not want to be plugged into your credit score and credit history? And if you have bad credit after the recession, isn't it even more vital to know what's going on with your financial profile, so you can rebuild your good credit?
The reality: Yes, life moves fast, but credit reports really don't. Some creditors report to the credit bureaus every month, while others do so every quarter. If you're truly obsessed with your credit history and credit score, perhaps you'll enjoy watching them creep up or down as the weeks and months go on. But after the initial excitement of looking through all of your personal financial data the bureaus have compiled on you, watching your credit history and credit score move can be a little like watching a shadow race by on a sundial.
What to do instead: The more economical way of getting almost the same result is to go to AnnualCreditReport.com (be sure you've found that exact site as there are similarly titled sites with less than noble intentions). Under law, you're allowed a free credit report from each of the three bureaus (TransUnion, Experian and Equifax) every year. If you stagger it so that you go to a different credit bureau every four months, you'll stay on top of things. Although they won't reveal your credit score, checking your credit report helps you make sure there aren't errors that could drag down your credit score.
Thanks to Dodd-Frank, you can get your credit score for free if you apply for a loan and are turned down. But if you really want to see your credit score without applying for something and being turned down, you can buy a one-time look at one of your scores from the credit bureaus when you get your free credit report at AnnualCreditReport.com.
For instance, Equifax charges $7.95. Yes, it's not free, but isn't it better to pay 8 bucks once or twice a year than paying nearly $180 each year for instant 24/7 access to your credit scores and history? Do that for five years, and you'll be out almost $900.
The high price of peace of mind
True, it's a free country, and if you want to pay for these credit card "benefits," by all means, go ahead. But keep in mind that the marketing pitches for these add-ons naturally make the argument that your financial security is at risk if you don't purchase these products. That isn't quite the case. Your financial security may well be at risk if you do get these products.
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