FOOL'S EYE VIEW
Another Credit Card Rip-off Exposed!

By Cliff D'Arcy
December 18, 2003

Bosses at the Office of Fair Trading, the Department of Trade and Industry and the UK's credit card companies must be pretty worried today. That's because they've all been criticised in the Treasury Select Committee's scathing report into the UK credit card market. In particular, MPs criticised lenders for their misleading advertising, excessive interest rates and confusing charging structures. Read more here.

However, Britain's credit card scandal goes far, far deeper than even MPs realise. As an ex-industry insider, I'm lifting the lid on another, less well-known, swindle...

Credit card repayment protection (CCRP)

CCRP is payment protection insurance for your plastic. It's an entirely optional insurance policy that meets your monthly repayments if you are unable to work because of accident, sickness or unemployment. It also pays off your outstanding balance if you die. (Another industry name is LASU, being the initials of the risks it covers).

It sounds great, doesn't it - protection against several of life's everyday risks? Sadly, seedy industry practices mean that CCRP is a lot less appealing than it should be. In theory, it should provide valuable peace of mind to policyholders. In reality, it doesn't and, arguably, it's a huge swindle.

Here are three reasons why I would never buy this cover.

1. CCRP is enormously over-priced

According to Moneyfacts, these are some of the UK's most expensive CCRP policies:

Premiums are expressed in pence per £100 of your outstanding balance per month. So, premiums on a balance of £1,500 at a rate of 79p would be 1,500/100 x 0.79 = £11.85 per month.

89p - Capital One Bank Classic
85p - Citi Classic Plus Visa
79p - Barclaycard, HSBC and Marbles
78p - Bank of Scotland, Birmingham Midshires, Halifax and NatWest
77p - Clydesdale Bank, Lloyds TSB, some NatWest and Royal Bank of Scotland cards, Ulster Bank (NI) and Yorkshire Bank

Of the 120 cards I analysed, all bar seven charge 65p per £100 per month or more for this cover. Here are the seven cheapest policies:

58p - Liverpool Victoria - CSMA card
59p - Hamilton Direct Bank and Bank of Ireland (NI) - Moneyback MasterCard
60p - Nationwide BS - Visa Classic and Cash Reward Visa, Liverpool Victoria - Frizzell card and Liverpool Victoria card

I know that most policies could be sold for 15p and still break even, so CCRP is between four and six times as expensive as it needs to be.

In fact, credit card issuers make vast profits from selling CCRP. Currently, we owe around £52.5 billion on our credit cards. If we assume that a fifth of this debt is insured with CCRP, that's £10.1bn. At an average premium of 73p per £100 per month, annual premiums come to a massive £920 million.

And how much of this £920m is profit? My guess is that benefits (payments made to claimants) and other costs come to around £170m, leaving the card companies and insurers sharing roughly £750m a year in commissions. Even if these figures are just my educated guesses, you still get the picture, I'm sure!

CCRP is absurdly over-priced: its true cost is a small fraction of the premiums that the card companies charge. Indeed, a cynic would say that lenders are happy to charge as much as they possibly can for this cover, knowing that consumers have no idea of its true worth!

2. Different policies pay out different amounts

CCRP policies are so fiendishly complicated that it's almost impossible for anyone - other than an industry specialist - to compare one policy to another.

For example, if circumstances force you to make a claim, some companies will pay you a tenth of your monthly balance (10%) for every month that you can't work. On the other hand, the worst policies will pay your minimum monthly repayments, which could be as low as 2%. In effect, the policy paying 2% is five times as expensive as the policy paying 10%, assuming they charge the same premium rate. Here's what I mean:        

Card issuer	Monthly cost per £100 of balance	Monthly benefit	Monthly cost per £100 of monthly benefit
Barclaycard	79p	10%	£7.90 (=79p/10%)
MBNA	72p	3%	£24.00 (=72p/3%)

So, on the surface, Barclaycard's policy appears the more expensive of the two. However, because MBNA's policy is far less generous when you come to claim, it is actually more than three times as expensive. Furthermore, with MBNA's policy, you'd have to be off work for three months a year to get back in benefits more than you've paid in premiums, which is highly unlikely!

Note that you pay CCRP premiums every month - even if you pay off your balance in full every time (unless you have a nil balance). If you are a 'full payer', why bother with CCRP in the first place? It's cover that you just don't need.

3. These badly worded policies are given the 'hard sell'

CCRP policies are packed with get-out clauses, small print and jargon, which makes them a mind-boggling read, even for experts! What's more, they are governed by largely worthless voluntary codes of practice; there are no government CAT Standards covering their sale. So, as with many other unregulated products, consumer protection is woefully inadequate in the CCRP market.

For example, lenders push CCRP sales very hard, via telephone calls, mailshots and so on, which is always a bad sign. (Then again, wouldn't you give it the hard sell, knowing how profitable it is!). However, CCRP salespeople usually make very little effort to establish if the cover is right for your needs, and often don't fully understand their own products.

Because of the small monthly premiums, CCRP is not a product that lends itself to advice. This, coupled with misleading advertising and reams of small print, means that we usually end up with partial information as to its suitability, at best.

A final warning!

To summarise: CCRP is shockingly over-priced and frequently sold using dubious sales techniques. Also, the policies themselves are packed with small print. I worked in this industry for eleven years, yet never bought a single policy - and I'd recommend you do the same.

Don't let card companies play on your fears. CCRP is an amazingly expensive way to protect your repayments if you die, lose your job, have an accident or fall ill. Don't buy it. What's more, if you already have this protection, give serious thought to cancelling any existing policies today.

If you must have protection against accident, sickness and unemployment, try shopping around for a stand-alone ASU policy, which you can use to cover all your essential monthly expenses, including your mortgage repayments.

The author owns shares in HBOS plc, the parent company of Bank of Scotland, Birmingham Midshires and Halifax.

More: Beware Over-Priced Loan Protection! | Mortgage Payment Protection Insurance | The Perils Of Payment Protection Insurance | Dealing With Unemployment.