Brits warned to avoid credit card PPI
Consumers have been urged not to take out payment protection insurance (PPI) on credit cards, after research found that millions of people mistakenly believe it will improve their chances of being approved for credit.
Research by Which? found that 32% of people applying for a credit card mistakenly believe that they have a better chance of being approved by also taking out PPI. It is estimated that nearly 10 million people in the UK have credit cards with PPI attached, earning providers a substantial £970 million a year.
Of those credit card customers with PPI, 13% were under the false impression it was obligatory or would improve their chances of being given credit.
Aggressive and mis-leading sales techniques could be to blame; Which? says that nearly 30% of people were told by their provider that insurance to protect their credit card repayments was a good idea. This is despite just 11% of credit card PPI claims actually paying out.
Doug Taylor, personal finance campaigner at Which?, says credit card PPI is “useless, expensive and poorly designed”.
“People want to be protected and have peace of mind, but credit card PPI, like a house of cards, won’t give you the support you need,” he warns. “In this time of economic uncertainty, people are effectively throwing away £970 million each year [on credit card PPI]. No one should have to take out PPI on their credit card.”
What is credit card PPI?
PPI is a type of insurance policy taken out against different types of borrowing, including mortgages, loans and credit cards, which should pay out if job loss, accident or illness prevents you from being able to meet repayments.
Credit card PPI accounts for almost a quarter of the PPI market, but only an average of 11% of policies are ever successfully claimed, according to the Competition Commission.
PPI has been blighted by mis-selling controversy, not least as a result of an investigation by the Competition Commission, which found banks are overcharging consumers by £1.4 billion.
It also found that millions of people have been sold PPI despite not being eligible to claim, and that too many companies pressurize borrowers to take out PPI by using aggressive or misleading sales tactics.
One of the main problems with credit card PPI is that it only covers the minimum amount that must be paid each month, meaning your balance may never reduce. In addition, policies normally only pay out for 12 months, and because most policies last for up to five years you could still be paying for insurance long after you have repaid your debt.
Finally, the fact that most PPI is sold as a ‘single premium’ is also extremely concerning. A single premium policy means the cost of the insurance is added to the amount you have borrowed and attracts interest.
Were you mis-sold PPI?
Which? has compiled a checklist of questions everyone with PPI should ask themselves. If you answer ‘no’ to one or more questions, then you may have been mis-sold and should read our guide and download the Moneywise letter template to help you reclaim your premiums.
1. Did the adviser or sales person make it clear that insurance was optional?
2. Were you told about the ‘significant exclusions’ under the policy? For example, one exclusion states people aren’t covered for any pre-existing medical condition, while another states that you might not be covered if you are over 65, are self-employed or on a fixed-term contract?
3. Was it made clear to you that you had the right to pay for the insurance upfront?
4. If you paid for the insurance as a single premium, were you properly informed that this could be added to the cost of the loan and would attract interest?
5. If your PPI policy expire before your loan or credit agreement? If so, was it made clear that you would still be paying interest on the policy?
Have you answered no to any of the above questions?
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
Exclusion is a potential loss or specific risk that an insurance policy does not cover and they occur in all types of insurance policies. Common exclusions include: natural hazards (exploding volcanoes, earthquakes) war, nuclear fallout, wear and tear (anticipated through the use of a product, especially motor insurance), UFO damage to vehicles, vehicles “stolen” by vengeful spouses, travelling any pre-existing health problems and travelling to countries the Foreign & Commonwealth Office deems too dangerous.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.