Financial rip offs

Here are seven of the worst financial rip offs, and what you can do to avoid them

We all know that sinking feeling of knowing you’ve been ripped off. Unfortunately, in the financial world there are quite a few offerings, products, services, and outright rip offs that you should be aware of. Awareness can help you avoid that sinking feeling.

While many of these financial offerings are appropriate under the right circumstances, it can sometimes still be difficult to tell the difference between a sound investment or expense, and the equivalent of flushing hard-earned money down the toilet. In fact, the difference is often in your personal circumstances.

Naturally, we all want to make wise financial choices and safeguard what we’ve worked hard to earn. While many of the items we cover in this article do meet legitimate needs, you’ll only be able to tell what’s appropriate versus slick sales by being financially educated.
As always, knowledge is power!

1. Unsolicited increases to your credit card limit

Ever received a credit card in the mail? Or just an increase to your credit card limit without ever asking for it? However generous such offers, and increases seem, they aren’t designed to help you – they’re made in the hope that you’ll get into debt and pay hefty credit card interest rates.

Fortunately, owing to tighter rules and closer scrutiny of New Zealand’s banks this sort of practice should be coming to an end. However, it still pays to keep your eyes open to avoid these sorts of situations.

2. Car Breakdown Insurance (Mechanical Breakdown Insurance)

Car dealers may claim breakdown insurance will get your car back on the road if mechanical or electrical parts suddenly fail and need repair. Buying the insurance can add more than $1,000 to your purchase, but the real issue is that the cover you get usually isn’t worth having. A thorough check of the fine print will reveal a huge list of things that aren’t covered, which usually includes servicing (such as replacing spark plugs, lubricants, and filters) and excludes anything considered a “pre-existing fault”. Most policies also have broad-ranging exclusions for “design faults” and anything determined to be the result of previous faulty repairs.

Mechanical breakdown insurance is usually worthless - there’s even a full article on New Zealand’s Consumer website dedicated to just how bad it is!

3. Payday loans

A payday loan is a high interest and short-term loan. Usually, these are for anywhere between 14 days to a year. They’re called payday loans because they’re often used as a bridge between paydays, and often include conditions such as making repayments on payday. The main idea of a payday loan is to help you get to your next payday, and that means they’re usually very quick and easy to get.

All that might be required to get one is a driver’s licence and your bank account details, which means that no-one is checking if you can afford to repay it or checking your credit history. This easily accessible money can be tempting for many, including those who are vulnerable because of unforeseen circumstances such as personal issues, a loss in the family, or someone finding themselves out of work.

The pitfalls of these loans can be huge, and include:

• People borrowing more than they can afford to repay – especially as there’s no credit or affordability checks.
• The high interest rates can be crippling and can quickly spiral out of control to be far more than was originally intended when someone first took out the loan.
• Falling into a ‘cycle of debt’ is a very real possibility, as the chance to extend or roll-over the loan may mean falling further into debt which can compound with the high interest rates to quickly become unmanageable.
• High interest debt can impact your ability to obtain other lending (such as a home mortgage) by adversely affecting your credit history, showing that you struggle to live within your means. This means lenders, such as banks, may think you’re a risky person to lend funds too.

4. Bank fees, including EFTPOS fees

Banks will often charge you a fee for anything from; visiting a branch, using your EFTPOS card, withdrawal fees from savings accounts, having or using an overdraft, transferring funds internationally, or just for having a bank account!

While these fees might not seem like much, they can quickly add up. To avoid this issue, try:

• Getting most fees waived by keeping your banking online or keeping an account balance above a certain level. Ask your bank what they offer in this area. Discounts or fee waivers are likely if you:
• Have lots of business with a bank,
• Have a high account balance or balances – though see point number 5 below if this is the case!
• Are a student or child.
• Additionally, if you’re repaying a mortgage, then ask your bank for a fee rebate or for all regular fees to be waived. Nearly all of them should agree as you’re one of their most valuable customers.
• For those on New Zealand Superannuation, many large banks offer ‘Superannuitant Accounts’ with no maintenance or transaction fees if you have your NZ Super or pension paid into this account. When we last checked, SBS Bank and KiwiBank also offer fee waivers for over 65s but didn’t require NZ Super to be paid into the account.

5. Bank savings accounts

Like many items on this list, there is a time and place to hold funds in a savings account with your bank. This is usually for:

• Contingency (emergency) purposes, such as to repair a car or visit a relative who falls ill, or
• To meet known expenses over the next two to three years. This could include for things such as a big overseas holiday or to renovate the kitchen.

For nearly all other purposes, savings held in a bank account are wasted. The banks offer a very low rate of interest, which after tax and inflation are accounted for will most likely see you losing money in real terms. Explaining this in more detail, one of our most popular articles to date is this one titled: don’t save money.

6. Funeral insurance

Usually overpriced and overhyped, funeral insurance is often a waste of hard-earned money. There have even been calls in Australia by key figures in the insurance industry (such as Professor Allan Manning, managing director of LMI Group) to ban adverts for funeral insurance.

As we all know we’ll die someday, using insurance to meet a known expense doesn’t make much sense. The known expense is paying for our own funeral, so for most people setting aside a sum to meet this cost is the best idea.

Admittedly, funeral insurance can make sense if someone has very limited financial resources and wouldn’t be able to pay for a funeral themselves. Though even in this case, people are sometimes still better off putting any money they’d spend on the funeral in an accessible fund designed to meet funeral expenses.

7. Payment Protection Insurance (PPI)

Often when you apply for a credit card or take out a loan, tacked onto the finance agreement is insurance that promises to make the repayments if you become ill or are made redundant… But will it?

Payment Protection Insurance (PPI) can be beneficial for people living ‘pay cheque to pay cheque’ but is nearly always a waste for everybody else. Sometimes this sort of insurance is added to something like a car loan automatically via a check box without enough questioning to determine if the buyer qualifies.

When it works, your loan repayments are covered for long enough to get you back on your financial feet. But all too often people find they've been paying money for nothing as they don't qualify to claim. If someone works part time, is between jobs, is raising children fulltime, or is retired there may be no cover. The Commerce Commission recently pointed out that it had seen premiums for credit-related insurance costing up to $1,500 on loans of $12,000 to $14,000. Had the person needed to claim for unemployment or illness the pay-out provided by the policy was three months' scheduled repayments, which was less than the cost of the premium!

PPI has had a bad rap in the United Kingdom over the past decade and more recently in Australia, where a Royal Commission into Banking has found several financial institutions to have behaved very poorly.

Before purchasing PPI, be wary. Find out how much you're being charged, check if you need the insurance, and if you qualify to claim.

The bottom line

With the huge and growing number of financial offerings out there, it quite literally pays to take care before making any financial decisions. To avoid the financial sharks and ensure you don’t encounter that sinking feeling of knowing you’ve been ripped off, here are the top seven financial products and services which are most commonly the biggest rip off:

1. Unsolicited increases to your credit card limit
2. Car Breakdown Insurance (Mechanical Breakdown Insurance)
3. Payday loans
4. Bank fees, including EFTPOS fees
5. Bank savings accounts
6. Funeral insurance
7. Payment Protection Insurance (PPI)

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