What Is Balance Protection?
The term “balance protection” refers to a form of credit card 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 is unable to make their payments due to illness, job loss, or other circumstances laid out in the insurance contract.
- 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 is unable to pay due to specified circumstances, such as illness or sudden unemployment.
- Although balance protection can protect the customer from defaulting on their credit card debt, it does not prevent against the growth of that debt, since it typically does not cover more than the card’s minimum monthly payment.
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 be unable to 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 for 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 nevertheless incur interest charges and therefore grow from month to month.
In this manner, balance protection can be viewed as insurance against the risk of default and the corresponding negative impact on the cardholder’s credit score. While prices vary, the premiums for balance protection are generally around 1% of the credit card’s outstanding balance. For instance, a card with $2,000 in outstanding debt might charge a balance protection premium of $20 per month, with the actual premium fluctuating based on each month’s outstanding balance.
Real World Example of Balance Protection
Kyle relies heavily on his credit card to cover his expenses, and has grown his outstanding balance from $500 to over $5,000 in recent months. In light of this, he has become concerned that his debt burden might become too large for him to bear, particularly in the event that he loses access to his income source due to illness or a sudden job loss.
To try to remedy this situation, Kyle researches the balance protection plan offered by his credit card company. According to this plan, Kyle can pay premiums equal to 1% of his monthly balance in exchange for coverage of the minimum monthly payment on his card. If Kyle is unable to pay due to illness, job loss, or certain other causes laid out in his insurance contract, the insurer will cover those minimum monthly payments.
Kyle notes observes that the minimum monthly payment on his credit card is approximately 1% of his monthly outstanding balance. Therefore, in his current situation, his monthly payment would be $50 whereas the monthly premium charged by the balance protection plan would also be $50.
Similarly, because the balance protection only insures against the minimum payments and not the full outstanding debt, Kyle concludes that purchasing this insurance would not protect him against the risk that his debts might spiral out of control in the event that he becomes unable to generate income. Instead, it is effectively only insurance him against the risk of incurring a negative impact to his credit rating due to missing a monthly minimum payment.
Reviewing these facts, Kyle concludes that the only way to truly reduce the risk posed by his debt is to prioritize repaying his outstanding credit card balance, with the goal of eventually paying off his full credit card bill each month.