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Credit_Bryan_Brenneman_CCFlickrIf you buy debt protection on your credit card, you’re probably paying too much and getting little in return. Those are the results of a study released last Friday by the Government Accountability Office into debt protection products, which credit card companies advertise as a way to protect yourself from sudden tragedies like unemployment or hospitalization.

Especially in the current economy, such protection may seem enticing—but it comes at a high price. Americans spent $2.4 billion on debt protection in 2009, but received only $518 million worth of benefits in return, the study found.

“I mean, that’s crazy,” says Gerri Detweiler, Credit.com’s credit expert. “I think these products are overpriced and not very good.”

The GAO studied the top nine credit card issuers, which control about 85% of the credit card market. These companies market debt protection extensively through direct mail, their websites and branches, and by e-mail. The service is offered as a way to postpone or eliminate some or all of your credit card debt in times of emergency, including loss of a job or a disabling accident.

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The fees for such protection are steep. The issuers charge between 85 cents and $1.35 per month for every $100 in card balance for debt protection. That adds up to $4.50 a month for a person with a $500 balance. The average person pays about $200 a year for the service, the GAO found.

But when tragedy does strike, good luck getting the benefits you’ve been paying for. Some policies won’t reduce or eliminate credit card debt for hospitalizations or disabilities if the cardholder has a pre-existing condition. Others require complex applications to receive benefits.

“I’ve heard a lot of complaints from people who paid for these products and then, when they needed them, they couldn’t get the benefits they thought they would get,” says Detweiler. “There usually are a lot of hoops they have to jump through.”

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Part of the problem may be that debt protection is relatively unregulated, the GAO found. While a few states require that consumers actually receive some type of benefit for all the money they pay, federal rules focus mostly on making sure that card issuers fully disclose the terms of their credit protection products.

That should change, the GAO said. The new Consumer Financial Protection Bureau, created last year by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, will be the agency responsible for studying debt protection products, and considering rules requiring some kind of quid pro quo between the money consumers spend and the protection they receive.

The bureau also could create educational programs to help consumers learn whether debt protection makes sense for them, despite the high cost.

“These products can be difficult for consumers to understand, but federal agencies offer few educational resources to aid consumers in assessing them,” according to the report.

Image: Bryan Brenneman, via Flickr.com

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