What Is Balance Protection?

The term “balance protection” refers to a form of credit card insurance, often called payment protection insurance.

Although the exact terms vary depending on the card, it generally covers only the minimum monthly payments on the card’s outstanding debt. This coverage is activated if the cardholder cannot make their payments due to illness, job loss, or other circumstances laid out in the insurance contract.

Key Takeaways

  • Balance protection is a type of insurance offered to credit card users, which promises to pay off the minimum monthly payment associated with the card’s outstanding debt balance.
  • This protection only applies if the cardholder cannot pay due to specified circumstances, such as illness or sudden unemployment.
  • Balance protection can protect the customer from defaulting on their credit card debt, but it does not prevent the growth of that debt.

How Balance Protection Works

Balance protection is an insurance product sold to credit card users. It is intended to protect policyholders from the risk that they will not cover their minimum monthly payments due to specific circumstances. Credit card companies offer balance protection to cardholders for a fee and will cover monthly payments if the individual becomes disabled, unemployed, or dies. Importantly, these circumstances are limited in nature and must be explicitly included in the insurance contract—with illness or sudden job loss being the most common examples.

Although some balance protection plans offer more generous coverage, most only provide the minimum monthly payments on the policyholder’s card, not the overall outstanding balance. This means that, in theory, a policyholder who becomes ill or unemployed could still face a debilitating debt burden despite having purchased balance protection. Although the insurance plan would prevent them from defaulting on their credit card, the unpaid balance would incur interest charges and grow from month to month.

In this manner, balance protection can be viewed as insurance against the default risk and the corresponding negative impact on the cardholder’s credit score. The cost of credit card balance protection varies depending on the card. According to American Express, for example, the cost can be a monthly charge of nearly $1 for every $100 on your balance.

Example of Balance Protection

Kyle and Shawn use their join-credit card to cover their expenses. It has grown into an outstanding balance from $500 to over $5,000 in recent months. In light of this, they have become concerned that this debt burden might become too large to bear, particularly if one loses access to their income source due to illness or a sudden job loss.

To remedy this situation, Kyle researches the balance protection plan offered by their credit card company. Kyle and Shawn note that the minimum monthly payment on their credit card is approximately 1% of their monthly outstanding balance. Therefore, in their current situation, their monthly payment would be $50, which is the monthly premium charged by the balance protection plan. The pair decide to take the balance protection, to be safe, while actively trying to pay down their balance and then get rid of their balance protection insurance.