Are you being taken for a ride by credit-card companies? Read on to find out about this huge scam!
Payment protection insurance (PPI) is one of the biggest financial rip-offs ever.
What is PPI, I hear you ask? It's optional insurance sold alongside mortgages, credit and store cards, personal loans, etc. If you fall ill, have an accident or lose your job, it will meet your monthly repayments until you return to work or, typically, for up to a year. PPI covering loans and cards also includes life insurance that pays off your balance if you die.
PPI sounds like valuable protection, doesn't it? However, this peace of mind comes at a huge price. Having worked in this industry for eleven years, I know just how hideously expensive PPI is. For every pound we spend on this cover, less than 20p is paid back to us in claims. In other words, the profit margin for PPI exceeds 80%. Another way of putting it is that PPI costs five times as much as it could!
I know of only one lender that markets a not-for-profit PPI policy: the small but beautiful Market Harborough Building Society (MHBS). MHBS gives this cover to its mortgage borrowers for 2.5% of their monthly mortgage repayment, which is less than half the cost of most other lenders' mortgage PPI. Hats off to MHBS, the Moral and Honest BS!
Although almost every mortgage lender overcharges its borrowers for mortgage PPI, the really dirty stuff goes on in the 'consumer credit' market (loans and cards). This article explains just how big a rip-off personal loan protection is.
But credit card repayment protection (CCRP) takes the biscuit. It can be astonishingly, staggeringly, mind-bogglingly expensive, as the following table reveals (sorted by final column; you'll see why in a minute):
The true cost
of CCRP | | | | |
|---|
| Card issuer | Example
Card | Premium as %
of card balance | Monthly benefit
(% of balance) | Cost as %
of monthly benefit |
| NatWest | Credit Card | 0.78 | 10 | 7.8 |
| Halifax | One | 0.78 | 10 | 7.8 |
| Barclaycard | Classic | 0.79 | 10 | 7.9 |
| HSBC | Classic Plus | 0.79 | 10 | 7.9 |
| Capital One | No Hassle | 0.79 | 10 | 7.9 |
Egg | Egg Card | 0.79 | 10 | 7.9 |
| Co-op | Advantage | 0.72 | 5 | 14.4 |
| Lloyds TSB | Classic | 0.77 | 5 | 15.4 |
| Morgan Stanley | MasterCard | 0.71 | 3 | 23.7 |
MBNA | Classic | 0.72 | 3 | 24.0 |
So, among the UK's ten biggest card issuers, the monthly cost of CCRP varies between 0.71% and 0.79% of your statement balance. However, you'd be wrong to weigh up these policies based on their premium rates alone, because some sneaky policies pay much smaller benefits!
The first six policies in the list pay you a monthly benefit of a tenth of your balance throughout the course of your claim. However, Co-op's and Lloyds TSB's pay a twentieth (5%) and the two American banks at the bottom of the table pay just 3%. Boo, hiss!
If you work out the monthly cost as a percentage of the monthly benefit, this figure varies between 7.8% at NatWest to an unbelievable 24% at MBNA. Let me put this into context: with NatWest's policy, you'd need to be off work for a month each year to make money from this policy.
However, with MBNA's cover, you'd need to spend at least three months of every year sick, injured or unemployed to make its policy worth buying. Yikes - at least highwaymen had the decency to wear a mask!
Note that even if you pay off your balance in full every month, you still cough up CCRP premiums, because your premium is based on your statement balance, which is usually greater than zero. For full payers, CCRP is a completely unnecessary expense!
Around one in five cards is protected by CCRP, which means that, currently, there are around fourteen million policies in force. Card companies are making around a billion pounds a year from pressure-selling this over-priced bilge.
If you don't want to be taken for a ride, give CCRP a miss!
More:Ten Ways To Get Ripped Off | Find your perfect plastic in our Credit Card centre.
