Balance Protection

What Is Balance Protection?

Balance protection refers to a form of credit card insurance that is also 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.

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 when specific circumstances arise. 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.

How Much Does Balance Protection Cost?

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 85 to 97 cents for every $100 on your balance. If you carry a balance of $5,000, this protection would cost you nearly $500 a year. Other cards may charge as much as $1 for every $100 of debt carried on a credit card.

Financial experts often counsel that it is wiser to use any money you might spend on balance protection fees to pay off the balance on a credit card or to purchase life insurance that would help cover your financial obligations in the event of an accident or job loss.

Example of Balance Protection

Kyle and Shawn use their joint credit card to cover their expenses. In recent months, their outstanding balance has grown from $500 to more than $5,000. In light of this, they have become concerned that this debt burden might become too large to bear, particularly if one of them 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.