Credit Insurance – explained

Credit insurance is insurance that companies will help some card holders to keep payments up to date if they suffer a huge loss in income. Credit insurance will not compensate the defaulting borrower, but the card issuer.

Credit insurance is rarely triggered simply when a payment is missed as this is seen as a “moral hazard” which is behaviour that would be made more likely by taking out the insurance policy.  Credit insurance is mostly triggered by an external event such as the loss of a job, longterm illness or death.  In many cases these eventualities are sold as separate policies.  

Credit property insurance covers items purchased by a credit card if damaged or stolen.

With credit insurance there is a minimum time between when the policy can be claimed for and when the claim can first be made.  This is to stop borrowers who realise that they are highly likely to fall ill or lose their job from taking out the insurance. Most policies have limits on the pay outs resulting from previously diagnosed conditions.

When a claim is triggered the minimum payments are paid, although in some cases the balance is paid off.  This can result in higher interest charges over the long term as interest will accrue at a high rate.  In most cases the credit rating is relatively unaffected.  However, the events which trigger credit insurance payouts are likely to affect the credit ratings more aversely than the payments.

Credit insurance is often sold to credit card customers by credit card providers as an additional service.  This insurance tends to be considerably more expensive than credit insurance sold by a third party.  It is often a default setting on credit cards and should be watched for in the charges when signing up for a credit card.

There are cases when card issuers insist on credit insurance.  This is the case for credit card customers with a low credit rating.  This can have the effect of masking an interest rate as the compulsory charge is not included in many interest rate calculations, even though the cost must be borne and the beneficiary of any pay out is the credit card company.  The advantage of credit insurance is that many people who would otherwise not get credit due to their poor credit record or other external factors are now able to get credit.