Many of us are guilty of buying something we don’t need - perhaps a bargain outfit in the sales or a cut-price electronic gadget. While the odd impulse purchase is harmless, signing up to a financial product you don’t need, or use, will prove a far bigger waste of money.
Here are six financial products to consider steering clear of:
1. ID theft cover
Falling victim to ID theft can be devastating as it usually involves criminals taking out loans, credit agreements and credit cards in your name. This insurance is designed to restore your good name with credit reference agencies, for anything between £50 to £80 a year. But before you sign up to such a policy, it’s important to recognise that you can do most of this yourself if trouble strikes by dealing with them direct. And crucially, your bank is responsible for fraud losses unless you have been negligent so again you can deal with them direct to arrange refunds.
You can take steps yourself to avoid ID fraud by keeping an eye on your credit report to identify early any fraudulent borrowing taken out in your name. For £2 you can see a statutory copy of your report using one of the three credit reference agencies - Experian, Call Credit and Equifax. You may want to check all three to be sure.
2. Mobile phone cover
Hundreds of thousands of mobile phones are stolen every year. The most common risk is that phones are left unattended in pubs and bars - when a quarter of all thefts take place. Getting cover for a smartphone seems like the right thing to do as they cost a small fortune to replace. Yet so many of these policies are so riddled with exclusions that it’s very difficult to make a claim in many cases. It's worth checking if your gadgets are covered by insurance outside the home - either through your home insurance or a stand-alone policy. Alternatively source quality cover through an insurer you can trust.
3. Extended warranties
Be wary of extended warranties, flogged at the cash desk when you are buying electrical appliances. This type of insurance is designed to cover the cost of repairs should anything go wrong with electrical items, such as washing machines, fridge-freezers or televisions. Sales staff are paid commission for selling this cover, so don’t get caught out by the hard sell. Particularly because a warranty can cost almost as much as the product and as technology improves, a model can quickly become obsolete. Replacing a faulty item will almost certainly work out cheaper in the long term. Don’t forget, under the Consumer Goods Act 2015 have protection. It states that goods should be of satisfactory quality, fit to do the job intended and last a reasonable length of time.
4. Store cards
Loyal shoppers might be tempted to take out a store credit card which comes with perks, including eye-catching discounts. Such cards can be a good way to get money off your shopping bill if you are making purchases anyway. But they can also encourage extra spending for those who get carried away with the lure of a reduction in the price. The real catch is for those who can’t afford to clear the debt each month. There will be hefty interest charges applied to the account that are typically much higher than those charged by regular credit card companies.
Interest rates on store cards reach as much as 30%. This compares to the average rate of 18.9% on a typical credit card. There are extra charges you miss a payment, go over your limit or pay late. A penalty charge of around £12 a time will b added on top of the interest charges, meaning costs will soon spiral, negating any savings made through member discounts. If you can’t guarantee to pay off the card in full, steer clear of these pieces of plastic altogether.
5. Packaged current accounts
Banks and building societies package up current accounts with so-called benefits and charge a monthly fee. They typically include travel insurance and breakdown cover and can cost up to £300 a year. It’s a needless cost if you don't use the extras. In many cases it’s more cost effective to switch to a fee-free current account, single out the “extra” that you do use, such as travel cover, and buy it independently.
6. Structured products
These stock market-linked investments were marketed to cautious savers as a way to gain higher returns than on cash accounts without the risks usually associated with shares. Some promised as much as 60% over five years, but only ever returned the original sum invested as returns rely on a series of stock market targets being met. Not all structured products are bad, but spotting the good ones requires an expert. Yet they are often so complicated that some of the people selling them don't even understand them. Even some well known banks and building societies have been fined for mis-selling in the past. Seek professional advice on selecting investments from an independent financial adviser. The Money Advice Service have a guide on how to choose an adviser.
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Money Means is a news and information series written by independent financial and consumer journalists and experts*. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.
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