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Credit Card Basics

What Is a Payment Protection Plan?

While we all plan to pay our bills on time, sometimes life throws an emergency our way that makes it impossible to do so. A payment protection plan is a benefit some credit cards and lenders offer that allows you to temporarily pause payments if you've experienced an emergency such as job loss or disability. However, before you sign up for one, be aware of the potential downfalls.

How Do Payment Protection Plans Work?

Payment protection, sometimes called debt protection, is meant to offer peace of mind by providing the ability to pause monthly payments on your credit card balance or loan for a certain time period if you experience certain hardships. Depending on the plan, you may not owe those payments at all during that time or you can have some of the balance forgiven.

While this may sound like a great deal, payment protection plans typically carry fees that vary based on your balance, and the criteria for getting them can be strict. Additionally, these plans are now harder to find; following a 2011 Government Accountability Office report that criticized their fees and numerous consumer complaints about the products, many credit card issuers stopped offering payment protection services.

Downsides of a Payment Protection Plan

Payment protection plans can help some consumers, but they're not for everyone. Keep these potential downsides in mind before you sign up for one:

  • Many payment plans have conditions and exclusions. For example, it might not be available in your state, or the specific hardship you want protection from might not be covered by your lender. For example, payment protection plans often won't protect you if you lose government benefits such as Social Security or pensions.
  • The payment plans are extra products you have to add on; you can't get the benefits if you don't add on and pay for this extra protection. This also means you may pay for this service and never end up needing it or even be able to qualify for using it.
  • Disability and life insurance plans may do a better job of covering your needs and protecting you financially.

When Are You Covered Under a Payment Protection Plan?

If you're curious about payment protection plan coverage, you'll first need to find out whether any of your lenders even offer a plan; call them to find out and ask about the rules, fees and other details.

To qualify for a payment protection plan, you must meet certain criteria set out by your issuer or lender. For example, some may require you to have been employed for at least a few months prior to enrolling, or you might not be covered for job loss if you were self-employed, worked for a family member, had seasonal work or had your hours reduced. You may also be precluded from signing up for protection if your disability took place too recently relative to when your plan would kick in. You may be expected to produce certain documentation to prove your disability, job loss or other condition. Finally, it's important to understand the caps on your benefits, such as how long they last.

When it comes to using your benefits, each creditor or lender will have different requirements for what types of events allow you to do so. For example, Discover offers two options: a short-term plan and long-term plan, and each has its own criteria. Under the long-term plan, you can qualify for up to 24 months of debt protection if you face a major hardship such as hospitalization, death of a spouse or immediate family member, job loss or disability. The short-term option covers you for three months for less drastic life events, such as marriage, moving, childbirth, adoption or divorce.

Payment Protection Plan Alternatives

While these plans can be good for those who don't mind the fees and are able to qualify, you may be better off finding other ways to protect yourself financially. Here are a few options:

  • Focus on building up an emergency fund. Make a habit of setting aside a little money each month into an emergency fund. Doing this can help you prepare for the unexpected and minimize the financial damage it'll cause. Your emergency fund should have enough in it to cover at least a few months' worth of expenses until you're able to get back on your feet.
  • Consider disability and life insurance. These financial products exist to help you or your family financially after an accident, medical disability or death. While insurance may be more expensive than a payment protection plan, it offers protection far beyond just covering your credit card or loan balance. It may also be more reliable and easier to access.
  • Reach out to your lender. If you're struggling to make your credit card or loan payments, whether you have a payment protection plan or not, call as soon as you can to let them know what's happening and see if they're willing to work with you. It's possible they'll give you some short-term leniency.

Consider Your Options

Missing a payment may be unavoidable when you're in a bind, but there are steps you can take to minimize the toll it can take on your finances and credit. Continue making at least your minimum payments to avoid late or missed payments, and reach out to your lenders as quickly as possible as they may be able to offer you help. Haven't checked your credit in a while? Check your free credit report on Experian to get an overview of where things currently stand.

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