The top 10 financial rip-offs
There are plenty of expenses in life that we can’t avoid – each year we shell out thousands on essential financial services, for mortgages, protecting our family or insuring our homes and cars.
While few of us are naïve enough to think the banks and insurance companies offering these services are charitable organisations, we often forget how adept they are getting us to put our hands in our wallets. Indeed, every year providers are raking in billions from products we don’t need or, sometimes, don’t even know about.
In some instances the fault lies with providers who mis-sell products or lead us to believe we must take them out. In others, banks simply rely on our apathy and collective reluctance to read the small print. So this month Moneywise investigates the top 10 ‘legitimate’ scams that serve to boost your provider’s profits at your expense and how you can turn the tables to stop spending and start saving.
1 Standard variable rates
Each mortgage lender has its own standard variable rate (SVR), which is usually the least competitive rate across the product range and what you will be transferred onto when your current mortgage deal expires. SVRs are notoriously high.
Lenders rely on our inertia not to remortgage or ask for a better rate when our mortgage deals come to an end we are automatically transferred onto the SVR.
Take the example of a borrower with a £150,000 mortgage – with an SVR of 7.89% they’ll be shelling out £1,147 every month. However, if they were to switch to a more competitive rate of 5.5%, their repayments would fall to £921 a month. That means our borrower paying the lender’s SVR is effectively paying £226 a month – or £2,708 a year – more than necessary.
So don’t let your lender cash in on your inertia by keeping tabs on your mortgage. Three months before your deal expires, ask your lender what it can offer you then shop around to see if there are any better deals on the market – there probably will be.
2 Payment protection insurance
Payment protection insurance (PPI) is sold alongside mortgages, credit cards, loans and store cards to cover repayments if you’re unable to work because of accident or illness, or being made redundant.
It sounds good in theory, but in practice it’s expensive, full of exclusions and usually only provides cover for 12 months. In addition there’s evidence that some borrowers have unknowingly agreed to buy PPI or been forced into taking it out. This is why PPI is under investigation by the Office of Fair Trading.
The cost of PPI is usually equivalent to 25% of the loan value and can increase the cost of borrowing by 9% a year, according to Citizens Advice. This is because PPI is often sold as ‘single premium’, which means that you pay interest on the cost of the insurance – making the loan even more expensive.
For example, a £10,000 personal loan with a rate of 6.8% would mean monthly repayments of £196 over five years without insurance. The total cost of the loan would be £11,760. Add PPI and repayments increase £39 to £235 a month, making the total repayment a staggering £2,340 higher at £14,100.
And if you did need to make a claim on PPI during this time, you’d probably find it quite hard. According to the OFT, only one in five claims are successful because there are so many exclusions.
So what should you do? If you do have PPI there’s a chance you have been mis-sold it and you may be able to claim your money back. Read our guide to reclaiming PPI premiums and download a letter template.
3 Extended warranties
Retailers try to sell extended warranties when you buy electrical home appliances, such as a computer, fridge or TV, and they make a staggering £900 million from them each year, according to Which? However, not only are
these plans overpriced they’re also becoming increasingly unnecessary.
Manufacturers usually guarantee goods for a while, normally 12 months. An extended warranty will cover goods for longer, such as three or five years after the guarantee has ended.
However, some warranties can boost the cost of your purchase by 50% or more.
Even if your purchase breaks during a warranty period, the owner would already have a legal right to repair or replacement from the retailer under the Sale of Goods Act, which states goods must be of satisfactory quality and fit for purpose. This can apply to goods for as long as five years after purchase.
If you decide to take out an extended warranty, you don’t have to buy it from the shop where you bought the goods. There are firms - including insurance companies and the manufacturers themselves – that sell extended warranties that are often cheaper. You can also now buy warranties that cover a number of appliances.
4 Mobile phone insurance
When you buy a new mobile phone or get a free upgrade through your service provider, you’ll probably be offered insurance. Policies vary in the level of cover they offer, but usually cover accidental damage or loss, theft and airtime abuse if your stolen phone is used to make calls. Some policies will cover more than one phone or loss or theft which happens abroad.
However, cover is expensive and exclusions mean it can be hard to claim.
Unless you have a habit of losing things you may find it’s worth grinning and bearing the loss, rather than stumping up for cover. Make a claim after five years and you could have already shelled out £450 in insurance.
So long as you report the loss quickly and get all calls barred, losing your phone shouldn’t be too expensive. Upgrades mean many of us have spares and you’ll only need a new Sim card.
If you really don’t want to risk going without cover, it’s often cheaper and more comprehensive to buy it from a specialist insurer.
5 Packaged accounts
Packaged accounts are current accounts that offer extras such as travel insurance, ID theft insurance, breakdown cover and competitive overdraft rates. However, these don’t come free and cost up to £150 a year. There is also concern about how they are sold. According to uSwitch.com, many people believe they have been upgraded to packaged accounts without their consent – so check your statements.
While some of the perks may seem good, they are only worth paying for if you use them. Sometimes the insurance on offer isn’t comprehensive , so you have to buy more.
There are many other current accounts that offer better overdraft facilities without a fee, and pay more credit interest on balances.
6 Store cards
When paying for something in a chain store, you’ve probably had a chirpy sales assistant asking if you’d like to save up to 10% on your purchase. This might sound like a bargain, but unless you clear your bill quickly, this saving can evaporate as interest starts to rack up.
Store cards are notoriously expensive but, despite that, £2 billion was spent on them last year, according to APACS, while the number of store card accounts has almost doubled from 7 million to 13.4 million in the past five years. The worst cards charge almost double the rate of some credit cards with Laura Ashley, Burton and Dorothy Perkins all charging more than 29% APR.
Research from uSwitch.com found that just meeting the minimum repayments on a store card at 27.9%, for example, could increase the cost of a Playstation 3 from £349.97 to a whopping £611.28.
Part of the problem stems from the high-pressure environment in which store cards are sold. When you are at a busy till point with a large queue of people behind you, you don’t get the chance to read the terms and conditions or think about the costs. So in short, just don’t do it. And if you already have a store card, pay it off. Quick.
7 ID theft cover
Identity theft is a real problem in the UK, with thousands of victims every year. Consequently there are lots of banks and credit companies offering ID fraud insurance.
The product is usually sold as a stand-alone product or as an add-on to home insurance; (some home insurance policies include it at no extra charge). The cover typically includes early-warning alerts to inform you of any credit applications made in your name and provide advice and help towards the cost of clearing your name.
While providers say these policies ease the stress of sorting out ID theft, consumer group Which? has slammed them as a complete waste of money.
Unless you have been negligent, any financial loss suffered as a result of ID fraud is already covered in the Banking Code. You can also get free advice from the government’s fraud prevention service, CIFAS (cifas.org.uk).
Equally you can protect yourself by keeping tabs on your credit file, through a credit reference agency, such as Experian, Equifax or Callcredit, with a basic report for just £2.
8 Wedding insurance
With the average white wedding now costing north of £17,000 and couples often spending a year to 18 months planning their big day, anxious brides and grooms are too tempting an opportunity for insurers to ignore.
However, Richard Mason, a director at Moneysupermarket.com, says wedding insurance is one policy you should not feel compelled to buy. “Insurance is there to buy you peace of mind, but unless you’re particularly worried you’re better off keeping the money in the bank.”
The cost of wedding insurance ranges from £50 to £190 and while that may not seem much in the big picture, it’s money you’ll be glad of when the honeymoon’s over.
Policies cover a range of incidents from lost rings, documents and presents to the photographer messing up or you being forced to cancel or curtail the wedding. Once again, however, there are some big exclusions, as Mason points out. “The main reason most weddings are cancelled is one party gets cold feet, but that won’t be covered.” He adds: “Where you’re likely to claim is where there is likely to be small print.”
One area where you may feel you need cover is public liability insurance if you hire a marquee, but cheaper standalone cover is likely to be available from your supplier, or if the marquee is to be pitched in your garden it may well be included on your household policy.
It’s also worth remembering that cover won’t stop things going wrong – it’ll just provide financial recompense after the event. However, if going without means you won’t sleep for the year, you may think it’s worth it.
9 Mobile phone contracts
Mobile phone contracts aren’t a waste of money per se, but many of us could be paying for texts and minutes that we don’t use.
The last time I reviewed my tariff I found I had been paying £35 a month for a contract that included 700 texts and 400 minutes, but was only using about 100 texts and 300 minutes each month. I switched to a lower usage tariff for £20 – saving £180 over 12 months.
You could be overpaying too and your provider is unlikely to point this out. So when you come to the end of your current contract, find out how much your average usage has been over the past 12 months. Ask what tariff matches this usage, but don’t end your negotiating there.
Customer service teams don’t usually have the power to change the set tariffs, but tell them you want to cancel your contract and you’ll be put through to the ‘retention’ department, who do. It’s worth being a bit cheeky.
Have a sum in mind that you’re happy to pay and ask what they can offer you. Be friendly and calm, but don’t agree until you’ve got a good deal – you can cancel and go elsewhere.
Don’t cut your free texts and minutes too low though – go over your allowance and you could be hit with a surprisingly big bill.
10 Credit card cheques
Credit card cheques are usually posted to you, unsolicited, from your bank or credit card company. However, they charge notoriously high rates and consumer group Which? estimates that companies rake in as much as £40 million in charges every year from credit card cheques.
You will be charged interest straight away on credit card cheques at a rate usually much higher than a card’s standard APR.
Which? also found that people with credit card debt are more likely to be targeted with cheques than those without. In short, don’t use them. If you receive cheques, destroy them, and ask your bank to stop sending them.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
A current account that charges a monthly fee in return for a “package” of additional services, such as travel insurance, credit card protection, mobile phone insurance, identity theft insurance, car breakdown cover or a “concierge service” that will book airline and theatre tickets or restaurant tables. However, many consumer experts say the features are overpriced and that more competitive deals exist elsewhere in the market and that very few packaged account holders actually take advantage of the features.
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.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
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%.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.