By Michelle Flores / Updated: Jul 19, 2019

How Does Credit Protection Work?

A credit insurance is the coverage of your loan in case you find yourself in a financial crisis. This is a type of protection that can be used when you are not in a position to repay fully or partially the remaining debt. The incapacity to repay your loans can arise due to:

  • Joblessness,
  • Accident,
  • Emergencies, or
  • Demise.

How Does Credit Insurance Work

The mechanism of credit insurance in these situations is that your insurance company guarantees that your creditor gets the monthly installments. It is an excellent approach to securing your score other than having your property being repossessed or going the collection way.

Types of Credit Insurance


But how do you determine if protecting your credit is worthy? To respond to that, we need to discuss the different ways of protecting your credit;

1. Involuntary Unemployment Protection

At present times, mass layoffs are common even with the largest companies like airlines or oil, companies. Regardless of whether you were a valued worker or not, it just happens. In the event, that you find yourself unintentionally jobless, your insurers are bound to pay a set number of installments.

Under such circumstances, protecting your credit can be highly advantageous in that that it can have your back till you secure another job.

2. Leave of Absence

Your insurer pays a predetermined number of installments to your loaner in case you go on a maternity/paternity leave or in general if you maintain absence from work to attend some family matters.

Only 12% of the workers in private organizations are paid their wages while on family leaves, which means that a majority (88%) of workers have to stay without pay throughout the leave period.

You might consider your previous vacations or sick off days to ensure that you get paid when you go for leave. Otherwise, your savings might not be enough to cater for your utility bills leave alone the loan and you find the way out is credit insurance.

3. Disability/Health Insurance or Accident Cover

Accidents together with some ailments are prone to leaving you disabled; in case that happens, insurers can make repayments each month to the creditor. They will continue paying till the time you will be in a position to resume the repayments.

It is important to note that numerous companies protect their employees against accidents at the workplace, which could be used instead of credit protection.

Besides, there are group policies that generally offer better insurance deals to the disability of workers. Hence, if such services are accessible at your workplace, you ought to think twice before double insuring yourself. If you got a student loan, you might also need to consider if you can benefit from the disability discharge.

4. Life Insurance

In case of your demise, you might leave behind a burden of debts with your family (such as huge house loans), of which it might be hard for your life partner to repay.

That is where credit coverage comes in; insurance company settles the debt immediately and saves your family from the struggles of making the repayments even to the extent of facing house repossession.

However, when you got a life cover with sufficient payouts, it can render credit life unnecessary. Therefore, consider all factors involved in case you already are insured.

5. Property Cover

The cover ensures payments to your creditor in case the property you purchased on loan is damaged or stolen. For instance, if your vehicle is vandalized, but you had insured your credit, the insurer will cater for repayments.

Cars, together with house owners, often have them covered; therefore, protecting your credit might be an additional and unnecessary expenditure.

Cost of Insuring your Credit

The expense incurred in credit protection depends on:

  • Loan amount,
  • Credit terms,
  • Credit type,
  • Type of cover,
  • Your state of living.

Commissions paid to creditors by insurers also play a significant role in cost determination, which makes premiums for credit protection cost more than premiums for ordinary covers.

The Accountability Office for the United States Government concluded that credit coverage premiums on balances in credit cards ranged from 0.85 to 1.35 dollars every month basis for an outstanding balance of 100 dollars. For instance, with a balance of 5,000.00 dollars, the cover cost can be anywhere from 44.00 to 67.00 dollars each month.

Message to Take Home
Choosing to cover your credit means that your month to month loan installments relatively increase since you must pay interests and insurance premiums as well.

When it comes to revolving/evergreen loans such as credit cards, premiums are included on each month’s statement and are dependent on the balance.

To Go For Credit Insurance or Not?

At times, creditors can attempt to offer to cover your credit which can as well come as a package with the loan. Therefore, you need to have explicit knowledge of what you are signing. Otherwise, you might be inconvenienced.

It is legal to protect credit but still not mandatory. Hence a creditor has no obligation by law to force you into it; otherwise, you are free to report them to the relevant authorities.

However, some situations will always call for credit cover. In this case, when meeting the decision of acquiring credit insurance, assess your particular circumstances and the cost involved.

Message to Take Home
In case you wish to guard the credit scores and the cost is considerable, protecting your credit might be the way to go.
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