Should you pay your auto or home insurance premium by credit card?
If you’re sending in your insurance premium via envelope and stamp, you may be missing out on an easier way to pay.
Many large auto and home insurers make it easy to pay premiums by credit card. Some even allow you to set up automatic payments.
Insurers have much to gain from offering this, says Michael Barry, a spokesman for the nonprofit Insurance Information Institute, and more are providing it as their customers demand convenience.
Knowing that a customer’s payment will be on time and knowing exactly what date the money will be coming is a big plus for auto and home insurance companies, Barry says.
But what about consumers? Is this the right choice for you? Here are some pluses:
• You won’t forget to pay. For people who are organizationally challenged, this removes the chance that your bill gets forgotten. “It takes one more thing off your plate,” says consumer advocate Beverly Harzog, a credit card expert.
• You can rack up rewards. These payments can be substantial and can get you one step closer to that free trip.
• It helps the environment. Paying with a credit card eliminates the envelope and the check.
• If you can’t afford the payment, this is a way to stay covered. Not having insurance is a bigger disaster than carrying a balance for a month or two, Harzog says. “Let’s say you need a new roof and you drain your funds, but you know the money’s coming back in soon; it’s a good bridge for you,” Harzog says. But don’t rely on this as a long-term solution, she says.
If you do find that you’re using the credit card as a crutch, this method might lead you down a dangerous financial path. Here are a couple of other downsides:
• If you change credit cards, you run the risk of a coverage gap. “I’m sure any insurer would work with you if this happens. But I wouldn’t take any risks with this,” Harzog says. When you change credit cards, make sure you inform your insurer right away, find out what date the payment is scheduled and follow up that day to make sure the right number was charged, she says.
• You could get charged a convenience fee. Visa does not let merchants charge customers these fees for recurring payments, but MasterCard does. American Express and Discover allow the practice as long as the policy is the same for all card networks. Translation: You can’t charge a convenience fee for a customer who has an American Express card if you’re not charging the customer who pays with a MasterCard, for instance.
Allstate is among insurers that offer the credit card payment option to customers, and about 18 percent of its customers pay that way, says Joan Skibinski, senior manager for payment strategies.
The company does not charge customers a convenience fee for the service, Skibinski says. Merchants do have to pay card networks when they offer this service, but Allstate sees that as “the cost of doing business,” she says.
Credit advisers give mixed reviews on paying an insurance premium by credit card.
Harzog gives a qualified endorsement. She says that if you’re about to apply for a mortgage or car loan soon, consider going back to writing a check or debiting a bank account for several months before filling out your application instead of using a credit card.
Harzog says this will help keep your debt utilization low, meaning the amount of your balance compared with your credit limit. Even if you pay your credit card bill off every month in full, your balance on any given day will be different. A big payment will narrow the gap between your balance and your credit limit, which can hurt your credit score, and every little ding on your score can work against you.
“Even if (your score) just dropped you 10 points or so, that could be the difference between good and excellent credit and that could make a big difference in the interest rate you get,” Harzog says.
Jana Castanon, community outreach coordinator for Apprisen Financial Advocates, a nonprofit consumer credit counseling service, advises against using a credit card to pay insurance premiums. Instead, she recommends consumers have the payment automatically deducted from a bank account with a debit card. That way, you get the convenience of automatic payments, but you don’t risk extra interest charges for failing to pay your credit card bill in full every month.
It’s also just bad personal policy to resort to a credit card for everyday expenses, she says.
“If you are doing that — putting insurance payments, food payments, your utility payments on a credit card and not being able to pay them off at the end of the month – then you need to seek financial advice to get your budget in order,” Castanon says. “That is a major financial red flag.”