10 rip-offs we all fall for
The financial industry is littered with rip-off products. Here are ten of the worst which you should always avoid.
It probably won’t be the first time you’ve come across these rip-off financial products, but we can all do with a reminder every now and then. After all, even the savviest among you can sometimes let your guard down, and anyone can fall prey to a slick sales pitch.
I’m reminded of the time (in my pre-financial journo days) when I was subtly persuaded into buying a special insurance policy to cover accidental damage to a new leather sofa. I shelled out about £140 to protect my seemingly delicate furniture. It seemed absolutely essential back then. Only in hindsight did I realise leather sofas are actually pretty hardy (who would’ve thought!) and I had been totally ripped-off!
Here are ten more products which do the same:
Credit cards and current accounts
1. Store cards
A store card may be a convenient way to buy goods at your favourite shop, but unless you pay your bill off in full every month, you’ll be charged a small fortune in interest. Let’s say your card charges a rate of 29.9% APR and you spend £2,000 which you repay over the next two years. The total repayments will run to more than £2,681 - costing you an extra £681. Even if you got a 10% discount (£200), clearly, when used in this way, a store card is not a savvy way to spend.
It’s far better to use a cashback credit card instead and earn a bonus in return for your spending. One cashback card will even allow you to spend interest-free. Read Get paid to spend interest-free to find out more.
2. Cash advance charges
Withdrawing cash from an ATM using your credit card has always been a huge mistake. That’s because the interest charged on these transactions is often eye-wateringly high. Take the market-leading balance transfer credit card - the NatWest/RBS Platinum Credit Card - for example. It offers one of the longest interest-free periods on balances, but the rate charged on cash advances is a whopping 27.95%, and there’s a 3% fee (minimum £3) to boot.
Your bank will do everything in its power to make money out of you. Here’s how to fight back and win!
3. Packaged current accounts
Packaged current accounts offer a whole range of extra perks such as free travel insurance and AA breakdown cover, mobile phone insurance and preferential rates on financial products. But there’s a catch: A monthly fee which could cost anything between £5 and £25. I seriously doubt you would use enough of the benefits to make the current account pay for itself. And besides, banking should always be free. Find out more in Ditch these awful current accounts.
4. Payment protection insurance
Surely, many of you are aware of rip-off payment protection insurance (PPI), and yet it’s still causing a staggering number of complaints to the Financial Services Compensation Scheme (FSCS). In fact, the FSCS recently reported that more 2,400 claims in relation to PPI were dealt with in 2009, with more expected this year.
PPI is a policy which is supposed to temporarily meet the repayments on credit agreements such as loans, credit cards and mortgages if you’re unable to pay them yourself as a result of accident, sickness or unemployment. But PPI is notoriously expensive for the cover it provides and difficult to make a successful claim under. Read Get £1,000 compensation for this rip-off - quick! for the latest PPI update.
5. Extended warranties
Extended warranties cover the cost of repairing or replacing an appliance if it breaks down. The protection usually kicks in after the manufacturer’s guarantee has expired (usually one to two years after buying the item) and lasts up to a further five years. But the trouble is warranties are horrendously expensive and modern appliances shouldn’t develop faults in the first few years anyway. What’s more, under the Sales of Goods Act, retailers will be liable if the appliance is faulty for up to six years after the purchase making an extended warranty utterly useless.
Follow these top tips to protect yourself against ID fraud
6. ID theft insurance
ID theft has become a serious problem, but ID theft insurance isn’t the solution. As with most rip-off insurances, the protection is massively over-priced, and you won’t be covered for any compensation for fraudulent transactions. Don’t forget, ID theft is a crime, and it’s the responsibility of your bank or credit card company to recover any money you may have lost. If you’re worried you may have been a victim of ID fraud, consider buying Protective Registration from CIFAS. It costs just £14.10 a year and means extra checks will be carried out before credit is granted in your name.
7. Mobile phone insurance
Yet another over-priced product, mobile phone insurance can cost between £5 and £15 a month, and you’ll also have to pay an excess if you claim. Some policies only cover you if you’re handset is stolen and won’t cover loss or damage. Worse still, the insurers are notorious for finding ways to avoid paying up altogether. If you have a cheap handset, it’ll probably work out better value to replace it yourself. Meanwhile, people with more expensive phones could include it in their home insurance policy for less.
8. Wedding insurance
Your wedding day can cost thousands so it seems sensible to insure against things going wrong. But you can get cover without having to shell out for this extra protection. For example, by paying for your venue, photographer, flowers and so on using your credit card, you can fall back on protection provided by Section 75 of the Consumer Credit Act as long as the goods you buy cost between £100 and £30,000. Section 75 enables you to pursue your credit card company for compensation when goods or services you buy using the card aren’t satisfactory. On top of that, your honeymoon should be covered by your travel insurance policy so there’s no need for extra cover here either.
And don’t forget, wedding insurance doesn’t cover the most common reason for cancellation: the bride or groom getting cold feet.
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9. Payday loans
If you run out of money before pay day, this type of loan provides a cash advance on the salary you’ll receive at the end of the month with no credit checks required. The loan is normally repaid automatically on the day you get paid, although it can often be rolled over into the following month. But payday loans are ridiculously expensive and typically cost around £25 per £100 borrowed which equates to an astronomically high APR. Check out The 1,737% APR loan to find out more.
10. Paying for debt advice
Finally, once thing you really shouldn’t pay for is debt advice. If you’re struggling to repay your debts, there are plenty of excellent debt charities who will negotiate with your creditors on your behalf without charging you a penny for their services. Try the Consumer Credit Counselling Service, Citizens Advice or National Debtline. Beware of debt management companies who offer to arrange a debt repayment plan in return for a fee.