Consumers with credit card debt, unpaid taxes or loans have one thing in common – help in repaying their debt without losing their homes or destroying their credit. Many people look for debt relief solutions at the source of their problems – the IRS, credit card issuers and other lenders. These services provide the help needed for many consumers but the government is concerned that for the price some are receiving too little for their money. To that end, debt protection products are being scrutinized by the Government Accountability Office (GOA), in the same way that the credit card industry was studied by the Federal Reserve.
The Consumer Financial Protection Bureau, created last year by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, will study debt protection products, and consider legislation to balance the money consumers spend and the protection they receive. The bureau could create educational programs to help consumers learn which products best serves their needs.
According to a recent study, consumers are paying too much for too little return when they purchase debt protection from their credit card company, advertised as a way to postpone or eliminate some or all of your credit card debt that may occur from unexpected life events like a disabling accident, hospitalization or job loss. The report also suggested that debt protection products can be difficult for consumers to understand, with little educational resources to help consumers assess them.
Americans spent $2.4 billion on debt protection products in 2009 but only received $518 million in returned benefits. The top nine credit card issuers, representing 80% of the credit card industry, were examined. These companies market debt protection extensively through direct marketing – sent U.S. mail, via email and websites and through their branch offices.
Most programs provide their service for a monthly fee of between $0.85 and $1.35 for every $100 in credit card balance, averaging $200 annually, according to the GOA study. But reaping the benefits may be hard to come by when the details and fine print are taken into account. Some policies won’t cover hospitalization if it was from a preexisting condition. Complex applications, loopholes, and too many restrictions may deter legitimate claims from being filed.
Is debt protection really worth the cost? According to the research, based on how the providers have the protection plans structured, it’s just not worth the cost for most people. Maybe in time, these services will develop into a good way to protect the consumer, but for now it’s not much of a service. We will see.