Forget Credit Card Insurance: Use Income Diversity to Self-Insure

Some credit card issues, especially in the U.S., offer a special type of "insurance" meant to protect you in the even that you are unable to make the minimum payment on your credit card. The idea is that you pay a percentage of your credit card balance in "premiums" each month, and when a financial setback occurs the credit card issuer makes your minimum payments for you. While this might seem tempting, it might not be the best idea. Besides, with proper planning, you can set up your own plan for "self-insuring" against such financial setbacks.

Problems with Credit Card Protection

One of the first things you will find, even with the best Canadian credit cards and best issuers in the U.S., is that these credit card protection plans are rarely all they're cracked up to be. When you sign up, you need to make sure you read the fine print, since there are a number of situations that are not covered. For example, in many cases these policies will protect you if you are laid off from a job, but if you quit and are unable to find a new job, you won't be covered. Additionally, there may be a dollar limit or a time limit associated with your benefits. You could run out of benefits before you heal from a bad accident, or before you find a new job.

You should also remember that you are paying interest on your premiums. If you don't carry a balance, you usually get coverage for free. However, if you do carry a balance, you can add quite a significant amount to your balance -- and you will pay interest on it. Most credit card issuers decide to add the premiums right to the balance, and if you are close to your limit, it can trigger fees if the premium puts you beyond your line of credit.

Alternative Income: Self-Insurance Against Financial Setbacks

If you want to "self-insure" yourself against financial setbacks, it can be a good idea to develop alternative income streams. You can do this by getting a second job, starting a side hustle, founding a home business, or even by income investing. If you take the time to build up alternative income, you can achieve a degree of income diversity that can help you weather life's financial storms.

Having more than one source of income can help you make debt payments if you lose your main source of income. In many cases, your alternative income streams will be merely supplemental, though, and not provide enough income to completely replace your day job. However, you can use your supplemental income to pay down debt and build up an emergency fund so that you are better prepared for unexpected problems that might arise. Plus, when a financial setback does arrive, you can use your income to help you avoid dipping as far into your emergency savings, or using a credit card.

With proper planning, you have no need for so-called credit card protection plans. Instead, you can create a situation in which you are prepared for what's next.

This post was included in the Carnival of Personal Finance at Narrow Bridge.