Beating Broke

Personal Finance from the Broke Perspective

What’s Credit Insurance and How Can It Protect Me?

By Leave a Comment

This post in collaboration with Paul Brian

Credit card spending continues to increase in the United States. According to NerdWallet’s 2018 household debt survey, credit balances carried month to month increased five percent in late 2018 to surpass $420 billion.

The same survey found that around nine percent of Americans who have credit card debt don’t think they’ll ever be completely free from it. Considering the average revolving balance among households is nearly $7,000, the hopelessness makes sense.

While careless spending may be the reason for many people’s misfortunes, it doesn’t tell the whole tale. Aggressively high interest rates can punish any type of financial hardship, self-imposed or otherwise.

In these cases, things like credit insurance can prove valuable. There are many types of credit insurance, ranging from consumer to business needs. However, for the purpose of this article, we’ll discuss what consumer credit insurance is and the protections it offers.

What Is Credit Insurance?

Credit insurance is just as it sounds. It’s an insurance policy that a borrower has on their credit card. It’s a safeguard that pays off the credit card debt if something unexpected occurs that makes repayment difficult. The main types of credit insurance include credit life insurance, credit disability insurance, credit unemployment insurance, and credit property insurance.

How Do These Different Coverages Protect Me?

On a broad level, understanding how credit insurance protections work is quite straightforward. Credit life insurance pays off your debt if you pass away instead of your family being burdened by what you owe, while credit disability will cover your payments if you become disabled and aren’t able to work.

Less common types of credit insurance are unemployment insurance, which takes care of payments if someone is laid off; and credit property insurance, which protects property used to secure a loan if the property is damaged.

As ValuePenguin notes, any of these coverages can be taken out as a single or joint policy. A coverage type may also be worded differently depending on the institution offering it.

Do You Need Credit Insurance?

Credit insurance seems prudent to have, but how essential is it? It’s important to have financial protections in place that will cover you and/or your family should something unexpected occur, but doing so via credit insurance is typically the more expensive option to take.

This of course excludes situations in which credit insurance is required by the lender, such as in mortgage loans. However, this usually only happens when the borrower puts down less than 20 percent. This insurance can also be canceled once the borrower has built their equity over 20 percent.

As you peruse credit insurance terms and offers, evaluate the benefits and costs of life, disability, or supplemental unemployment insurance packages to ensure you’re getting something you actually need.

If you do find a credit insurance package you like, be sure to look at the fine print. It’s often a lack of preparedness and understanding that buries consumers in debt in the first place, which a quick scan of Freedom Debt Relief reviews unfortunately verify.

Like any credit card agreement, credit insurance policies are packed with jargon, small font, and exclusions. Ask questions until you know what you’re getting in a credit insurance policy. Ask questions like:

  • Does the insurance cover the entire loan’s entire term and balance?
  • Are there any exclusions that would impact coverage?
  • Does the lender have the right to change or cancel the policy at their discretion?
  • How long do the benefits take to be paid?

The last thing you want to do is pay for a policy monthly only to find that it doesn’t protect you in your time of need.

Credit Cards as Emergency Funds

By 15 Comments

Everybody knows they need an emergency fund.  Right?  Right.  There’s some argument about how much to keep in your emergency fund, but the general rule is no less than $1000 and ideally 6-12 months of expenses.  And common savings strategies says that you should keep that money in a nice comfy savings account that you can access as needed.  But, let me play devils advocate for a minute here.  Let’s say you had $1000 in your emergency fund.  What could you do with that $1000 if it were freed up and spendable?  What if, instead of having your emergency fund in a savings account, you used a credit card that had no balance on it?

You read that right.  A credit card.

Take you’re average credit card with a $1000 to $5000 credit limit (higher if needed) and keep no balance on it.  You’ve got a ready made source of funds, up to the limit, that you can access from just about anywhere.  And, it frees up your emergency fund savings to pay down debt.  Or invest.  Or, you can still keep it in a savings if you want and just use the credit card to supplement the emergency fund so you don’t have to keep such a high balance on it.

Pros and Cons (My wife likes these lists and always makes me write one when making big decisions…)

Let’s look at the pros for using a credit card as an emergency fund.

  • Cash is freed up for investing/paying down debt.  Why earn 1% on your emergency fund cash when you could be paying off debt that you’re paying 10% or more on?  Or, that you could be investing and possibly earning a nice return on?
  • No balance needed.  The card would be dedicated to the emergency use, so you wouldn’t carry a balance on it unless you had an emergency.
  • Available anywhere.  You can instantly access your emergency fund from anywhere your card is accepted.  Which is virtually anywhere.

Now, let’s look at the cons for using a credit card as an emergency fund.

  • Card could be closed.  If you don’t carry a balance and never need it, there’s a chance that the card company could close your account and you wouldn’t be able to use it when you needed it.  There are ways around that.  You could use it for a specific bill each month and then pay it off just like you would if you were paying the bill normally.  Problems could arise if you don’t pay that balance though and fill up the card.  Then you wouldn’t be able to use it either.
  • Interest charges.  Nobody likes paying interest on anything.  If the emergency is big enough and bad enough that you aren’t able to pay it off right away, you’ll start racking up interest.  That can lead to a quick spiral into the same debt boat that you were in to begin with.  Or worse.

I don’t know if I could recommend using a credit card as your only means of an emergency fund.  But, I think you could make a pretty good argument for using one to supplement your current emergency fund.  Let’s say your goal is to have 3 months expenses in your emergency fund.  And that your expense are $5000 a month.  That’s $15000 that will just be sitting in a bank doing nothing more than earning 1% interest. If you’ve got a card with a $10000 limit on it, you could pare that down to just $5000 in the bank and use the other $10000 to pay off a bill.  Or invest in something.

I think the biggest problem with using a method like this is the potential pitfalls.  If you are unable to keep the card active and balance free, you’ll have problems using it when you need it.  If you do need it and are able to use it, but not pay it off, you could potentially end up in the deep water again.  On the other hand, if you use up a cash emergency fund, you still need to pay it off, but you won’t have to pay interest on the part you used.

Using a credit card as an emergency fund is doable.  But, I can’t suggest it for any but the most disciplined.  One wrong step, and you could end up having more of an emergency than you would have normally if you just had a cash emergency fund.  And that could lead to disaster.

What do you think?

Now, I want to know your opinion.  Would you consider using a credit card as part (or whole) of your emergency fund?  What about using a line of credit as an emergency fund source? Would higher interest rates on savings change your mind? What pros and cons did I miss?

Using 0% Interest Rate Credit Cards

By 2 Comments

The introductory and balance transfer 0% interest rates on some credit cards can be a very enticing benefit. The fact that we see it offered so often proves that it works as a marketing ploy for the credit card companies. Some people take advantage of the offers and do what they call “0% rate arbitrage”. They take the CC company up on their offer and then pull the money out as cash and dump it into a interest bearing account where they can make several percent on the money. It’s like free money. But are the offers worth using if you’re like me and just want to be debt free and live a financially responsible life?

The answer is not a straight yes or no answer. In fact, it isn’t really even a straight “maybe” answer. Much like most financial products, it is very dependent on your personal situation. Make no bones about it, I dislike credit cards. If I can, I will be credit card free some day and use only my debit cards. However, until that day happens, I’m stuck with them. I don’t use them, but merely pay them off. Until they are paid off, I’ve still got a few.

While I have no intention of ever trying the arbitrage that some people try, I have and will use the 0% offers to help with my debt repayment. It’s a free loan. Sure, the rate is temporary, and the rate on expiration is likely just as bad as the card I transferred from. But, for that introductory period, I pay no interest, and every penny that I send as a payment goes towards paying off that balance. Essentially, I’m making 8%, 9%, and in some cases 20+% on my money. The offers can be a great tool while you are repaying your debt.

Once you are done repaying your debt, however, credit cards have little to no use to you. The concept is that a credit card is a way for you to have a open line of credit whereby you can access your “credit” anytime you want from virtually anywhere. However, if you are a financially responsible person and maintain a debt free lifestyle, you’ll likely want to pay cash for nearly everything. Obviously, a debit card or good ol’ cold hard cash is your tool of choice.

One exception that could be argued for is reward cards. These are cards that give you rewards based on the amount of money you spend using your card. If you are responsible and pay off your balance within your grace period, you can make a pretty good argument for the use of a reward card for the sake of the rewards. And some of the rewards can be quite tempting. Airline miles, gas discounts, gift cards, and even cars are among the lists of rewards.

Some folks (like Ramit of I will teach you to be Rich) think that the reward cards are a horrible thing. The possibility of missing a payment or letting your spending get out of control is always there and one slip up can cost you well more than any reward you might get. And unnecessary risk is something you don’t want in your financial life.

Back to the 0% cards though. The bottom line is that if you are already using some self control and not using your cards, transferring the balance to a 0% offer can save you quite a bit of money over those few months that the rate is that low. If you can’t manage the cards you have, though, forget it. The risk of causing more harm to yourself is too great to add more accounts to your portfolio. Also, don’t let a great introductory/transfer rate buffalo you into signing up for what would otherwise be a horrible card. Do your due diligence and read the fine print for annual fees, grace period, other fees, and most importantly the normal rate. I’ve seen several of these offers that are great, until the offer is over and then you’re hit with a 29.99% rate. Obviously, the extra savings of the low rate wouldn’t outweigh the normal rate if you’re transferring a balance from a card that only had a 8.9% rate!

Be careful. Learn what you can and make as educated of a choice as you possibly can. I don’t condone using credit cards because I know first hand the damage they can do to a persons financial life, but I recognize that these offers can be a very valuable tool for the responsible few who have learned to handle their money properly.