The truth about best buy tables
Whether you are in the market for a personal loan or credit card, mortgage, savings account or insurance policy, your first port of call is probably a best buy table. These tables on price comparison websites, such as moneysupermarket.co.uk or Moneyfacts.co.uk, have revolutionised the way we buy financial services.
Gone are the days of trawling several providers on the high street to get different quotes. Now it's simply a case of entering a few details online and with a click of the mouse the best deals on the market appear on your computer screen in seconds. More and more of us are finding better value deals on our financial products.
So you'd be forgiven for thinking best buy tables are just that: tabtles showing the best deals. However, some digging around by Moneywise reveals they may not be quite what they seem.
These sites have built up a reputation as consumer champions, presenting us with impartial, independent information that we can easily access and compare; they monitor rates and new deals, basically doing the shopping around for us.
As they have become a vital way of finding the best-value deals for both the press and thousands of consumers on a daily basis, financial services providers that reach the top spots in best buy tables can afford to slash their huge marketing budgets and simply sit back and watch the business roll in.
Behind the scenes
Although price comparison sites may appear to work in the same way - you search for a particular product and the site returns the best deals that meet your criteria - each site operates and earns revenue in a different way. This became evident when Moneywise carried out the same search across several comparison sites, only to be presented with different sets of results. Surely the best buy deal would feature at the top of every table? Well, this is not the case.
Some sites charge commission to providers when customers click on their product in the table, some charge commission when you apply and others only if you purchase a product. The sites are reluctant to reveal how much commission they receive, but it's thought to be anywhere between £30 and £120.
The commission levels often vary within the same site, which means that certain products and providers get promoted over others because of the commercial relationship these providers have with the site. It's also a similar situation with advertising, which price comparison sites rely heavily upon.
Scouring the market
Although these commercial relationships cloud the impartiality of best buy tables, the big players certainly search a large chunk of the market. However, there is no such thing as a price comparison site that offers every single deal on the market so don't be fooled into thinking the 'best buys' they list are the only ones out there.
Access to such a wealth of information is good for consumer choice. But the impartiality and comprehensiveness of the smaller sites is also under scrutiny because of their commercial ties. Confused.com, for example, is owned by insurer Admiral, while Comparethemarket.com is owned by the Budget insurance group.
"Best buy tables are the single most influential factor in a consumer deciding what product is right for them, so it is dangerous that many continue to view them as an impartial source of information," says Mike Lazenby, Kent Reliance Building Society's chief executive. "Price comparison sites should be regulated by the Financial Services Authority (FSA)."
This concern is echoed by the independent research and policy organisation, The Resolution Foundation. It didn't go as far as pushing for regulation, but instead called for a voluntary code of practice for price comparison websites.
How to bag a bargain
So what does this mean for consumers? Price comparison sites do provide a valuable service, helping us shop around for financial services; the arduous alternative is to call all the providers yourself.
However, try to avoid relying solely on one best buy table. The key to ensuring you always get the best deal - whether a mortgage, credit card or insurance for your pet - is to use a number of sites, backed up by some research of your own.
We all have different banking needs, so the key is to identify yours, then search for the product to match.
First, decide how much you want to save each month and whether you have an initial lump sum to put in. Think about what you're saving for - a rainy-day fund, a house deposit or a nest-egg for the kids. This will help you clarify whether you need easy access to your money or want to let it grow over a period of time. Also, consider how you would like to access the account - by post, phone, online or visiting a branch.
The first port of call for savings should be a cash ISA (individual savings account) because we can each save up to £3,600 a year tax-free 2008/09, whereas growth on other savings is taxed at your marginal rate.
If you've already used your ISA allowance, your choices are broadly a fixed-rate savings account, where rates are currently very competitive but your money will be tied up for anywhere from six months to five years, or a more flexible notice or no-notice account.
Credit cards and loans
When searching for a good credit card or personal loan, your primary concern should be to find the lowest rate, so you're not paying more than you need to for the debt. There are a few other factors to beware of, however. The first is that you may not be eligible for the best rates if you have a poor credit history.
Also, personal loans are often rated by 'typical' APR, but there is no guarantee that you will qualify for this when you apply, as advertised APRs are only offered to around 60% of borrowers.
Another point to bear in mind is that the deals for personal loans tend to be rated for round sums, such as £5,000 or £10,000, and you may not get the same rate if you want to borrow £7,500, for example.
With credit cards there's no one card fits all, so it can be useful to have several cards for different uses. If you plan to use your card for spending, look for a card with 0% on purchases, but if you have an existing debt on a credit card, look for one with 0% on balance transfers. These 0% deals are for a set period, usually 12 months, so you'll need to remember to switch cards when the deal ends to avoid being stung by a high rate.
Mortgages are complex products and repayments are most people's biggest monthly expense, so it's particularly important to understand the product to ensure you get the best deal. Mortgage best buy tables are very simplistic - while a search on two sites will give you an overview of the market, it's up to you to determine whether a deal is right for you.
There's no point taking out a flexible mortgage, for example, if you don't plan to use the features, and offset mortgages are only a good idea if you have a lump sum in savings.
It can be tempting to opt for the lowest rate, but it's important to look at what the loan will cost you over the whole term, taking into account arrangement fees, higher lending charges and early repayment penalties. You'll also need to consider how you want to repay the loan and how long you want to be tied into the deal.
Insurance can be a tricky product to buy - it's important to look at a range of factors and not get sucked in by the headline rate because this is unlikely to be the final price you pay.
To carry out a true comparison you'll need to compare like with like, so start by writing a checklist to identify the features you need from your policy. For example, for home insurance it might be £200,000 rebuild cost and £10,000 contents cover, including cover away from home, while for travel insurance your requirements might include winter sports cover, £500 travel money and £1,000 baggage cover.
Price comparison sites search both direct insurers and brokers, and it's worth carrying out searches on three sites to get the widest range of results. For motor insurance, always check Tescocompare.com as it includes RBS brands that are excluded from other sites.
Check the small print for exclusions that could sting you in the event of a claim - a common one for holidaymakers is claiming for an accident after a few too many sangrias, only to find they're not covered if the accident happened while under the influence of alcohol.
When you're happy that a few of the deals match your criteria, phone the providers to negotiate the price directly. They will ask a few more questions at the application stage, so the final quote will often be higher than the price on the comparison site, but they will be eager to secure your business so will often be prepared to better your renewal quote or beat the deal offered by a competitor.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
This refers to the terms of your mortgage and not the interest rate you pay. Flexible mortgages offer the borrower the ability to adjust monthly payments to suit their ability to pay. Although there’s no precise definition of a flexible mortgage, it should offer: interest calculated on a daily basis; the facility to make overpayments at any time without incurring penalties; the facility to underpay; and the ability to take a payment holiday (but these may be only options if you’ve made prior overpayments). Flexible mortgages require you be disciplined in your finances and their main drawback is the flexibility comes at a price as lenders charge slightly higher rates for these types of mortgages.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
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.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.