Q: Capital One asked me to sign up for their payment protection plan. I Googled it and see a ton of complaints alleging it’s a scam and a rip-off. I even saw stuff about some class action lawsuit settlement over it. What’s all the fuss about?

A: If you’re not familiar with payment protection, it’s an insurance-like benefit that Capital One and many other credit card companies offer. The exact coverage varies by issuer, but in a nutshell, what it usually offers is the ability to cancel or defer minimum payments in the event of disability, job loss, and other life events. Some plans will also cancel a balance if the cardholder dies.

Cost vs. benefits?

This optional plan usually costs around 1% of your monthly balance, give or take a few pennies. The Capital One credit protection fee is $0.99 per $100 of the balance on each statement’s closing date.

That may not sound like a lot, but you have to remember that you are paying it 12 times per year. And even if you pay your credit card bill in full, you are still charged the fee since it is calculated using the amount on the statement’s closing date.

So let’s say for 12 months in a row your statement balance was exactly $1,000… That equals $118.00 in fees! Or if you want to think of the cost in terms of an APR, it’s like paying 11.88%.

But are the benefits worth that price tag? Probably not. But this criticism is not specific to the Capital One payment protection plan, but rather all plans regardless of the issuer. For a more detailed analysis, check out my in-depth look at credit card payment protection.

Why all the fuss about Capital One?

So if this isn’t worth it, regardless of which credit card company offers it, then why is Capital One taking so much heat for it? Well, here are some things that the Spinelli class action lawsuit alleged:

• The plan restrictions were not sufficiently disclosed during pre-enrollment
• Obtaining benefits for eligible claims was “too difficult”

In this particular case, a settlement with Capital One was reached. Cardholders who were enrolled in the payment protection plan anytime between 1/1/05 and 7/31/10 (or 9/28/03 thru 7/31/10 for those in Florida) may be eligible to collect. Unfortunately, the amount per claimant is only $15 to $63, which has upset a lot of people, who might have paid hundreds of even thousands over the course of that period.

Difficulty canceling the plan. To the best of my knowledge this complaint was NOT part of the class action lawsuit, but a lot of people have claimed it hasn’t always been easy to cancel the payment protection once they are enrolled in it. I found this YouTube video which is an example of this:

Conclusion?

The truth is that singling out Capital One is unwarranted, because this is an industry-wide issue. Many other credit card companies have similar complaints and lawsuits against them for these same allegations.

Whether or not Capital One broke the law with their payment protection plan or there was a “scam” going on, I do not know. But what I do know is that payment plans are usually an unnecessary add-on, regardless of who’s offering them.

Written April 2011