What is credit card PPI?

However, how many of us really know what credit card PPI is and whether we were mis-sold it? Let’s take a look at what the product is, whether you should be considering a claim and why it’s not all bad.

What is PPI? PPI stands for payment protection insurance. This is an insurance policy that you can take out to cover repayments on mortgages, loans or credit cards if you have an accident, are ill or become unemployed. The policies are designed to make sure that borrowers can cover their repayments if they are not in work and can therefore avoid entering into a spiral of debt.

Credit card PPI relates to policies that cover credit card repayments. Typically with a credit card PPI product, you will pay for the policy in the form of a monthly premium, which will be added to what is owed on the card at the end of the month. If you need to claim on the policy, you will most likely receive a monthly benefit of somewhere between 3% and 10% of what is owed.

How was PPI mis-sold? It is important to say that not all PPI policies are mis-sold. It was uncovered that, in the past, sales staff often did not explain the policies properly and they were sold to people who weren’t eligible for cover. Sadly, mis-selling was so rampant that a number of credit card issuers have paid out billions of pounds in compensation to customers.

If you think you had, or currently have, a PPI product, it might have been mis-sold to you if:

• You didn’t agree to take it out, but it was sold to you anyway;
• you were led to believe you would not be accepted for a credit card/mortgage/loan unless you took out a policy;
• it wasn’t made clear to you that you were taking a policy out; or
• the details of the policy were not properly explained to you.

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Is PPI all bad? It would be easy to read the headlines and hear the adverts encouraging you to claim compensation and think that PPI is a product you should avoid. However, there is a time and a place for it. As with any insurance, it is hard to tell when you are going to need it, but if you have a mortgage, loan, or credit card, a PPI policy would ensure that you were covered for a short period if for some reason you were unable to work. Missing repayments can have a detrimental effect on your personal finances, and missed credit card payments can quite easily lead to a spiral of debt.

If, however, you are self-employed, retired or unemployed, a PPI policy is unlikely to cover you. Additionally, if you have a pre-existing medical condition, you may not be covered. If you are thinking of taking PPI out, make sure you read through the policy documents and ask the provider to explain anything that isn’t clear.

Another key point to make is that PPI helps to protect you if you have borrowed money, but if you are worried about loss of income because you can’t work, there are other products such as income protection that would be more suited to your needs.

So is PPI the big bad wolf? If you are clear about whether you need the product, what the cost of the product would be and the details of the policy, then it could be the safety net you need if you are worried about finding yourself with debt you are unable to repay. As with any insurance, it is up to you to judge whether it is necessary for your circumstances.

Struggling with credit issues? There are credit cards designed to help people rebuild their credit after stumbling. Check out our list of top credit builder cards here .

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First published on The Motley Fool