Watch out for these financial products.
When you’ve got financial concerns, many people want to give you their two cents: from television advertisers and magazine articles, to solicitation emails that offer a variety of ways to make ends meet. Unfortunately, there’s no magic solution to our financial difficulties. In fact, if we’re not careful, we may exacerbate our financial problems by choosing the wrong financial products for our circumstances.
Financial products are not “one size fits all” and many of them may not be right for you. Certain products should be avoided as much as possible, while others warrant a careful look to see if they truly fit your needs:
Financial Products To Be Careful About
1. Bank Accounts With Too Many Fees
With so many free checking and high yield savings accounts available today, why pay bank fees? Monthly maintenance fees, annual fees and per check fees are unnecessary expenses in today’s competitive banking market. Check out and compare online banks to find top savings bank rates that are available today.
2. Interest Bearing Credit Cards
If you don’t pay your credit cards in full each month, you’ll be paying an interest on your debt balance. Usually, you get 3 weeks to a month to pay your credit card debt without getting slapped with the typical 10% to 25% (or more) in interest rate charges. This means that if you make only the minimum payment, it can take you 20 years to pay off a $1,000 credit card!
Tip: Carefully review interest rates on purchases versus cash advances. Case in point: Household Bank claims to offer a 7.9 percent variable APR on purchases but a closer look reveals their default APR is 29.49 percent with 25.15 percent APR charged on cash advances.
3. Retail and Specialty Credit Cards
Stores and specialty organizations lure you into their credit cards with low introductory interest rates, bonus merchandise and rewards programs. However, most retailers charge interest rates in excess of 17 percent so having an unpaid balance can cost you more than the incentives are worth. For instance, as a hook, the Target Guest Card donates 1 percent of purchases to your favorite local school. But its current interest rate is 21 percent! Even with 10 percent discounts on in-store purchases, this card is an expensive proposition unless you pay off your balance in full each month.
4. Credit Cards With Extra Fees
Check out the terms and conditions of your credit card carefully. Some credit cards charge a monthly maintenance fee of up to $10, costing card holders over $100 annually. With so many credit cards to choose from, you should be able to avoid those charging any maintenance or annual fees. One of the worst credit cards around? Check out Aspire, a card that clearly aspires to separate you from your money.
5. 401k Debit Card
401k debit cards give us quick and easy access to any loan accounts we establish against our retirement funds. This way, we can get access to our retirement funds via ATMs. Since 401k loans that are not promptly repaid will be considered as early withdrawals and will trigger a 10 percent penalty with tax expenses, I find the 401k debit card to be a dangerous financial tool.
6. Detrimental Mortgages
It may be best to avoid certain mortgages, depending on your personal financial circumstances. Do review the repayment terms, interest rates and conditions of any mortgage loan you are considering:
ARM Mortgage. An adjustable rate mortgage (ARM) is exactly what the name implies. The rate fluctuates with the defined ARM indexes. If interest rates soar, borrowers may be faced with a monthly mortgage payment increase of $100 to $300 or more. This unexpected increase can wreak havoc on your budget. The unpredictability of an ARM mortgage makes it difficult to set up a solid financial plan.
Balloon Mortgage. This is another dangerous mortgage. Smaller, fixed rate monthly mortgage payments are made for a set term with larger, ballooning payments at the end of the term. It is not uncommon for homeowners to be unable to cover the increased payment at the end of a balloon mortgage term, thereby jeopardizing the security of their largest asset.
Interest Only Mortgage. These mortgages charge 100% interest payments for a specific period of time but eventually, you have to start paying off the loan. Unfortunately, this means you are paying a lot of money in interest without making headway on your principal. You can consider this one of the most expensive mortgages to get.
Jumbo Mortgage. Jumbo mortgages allow people to secure very large mortgages that are above the set industry standard for “loan limits”. They require a 5 percent down payment with interest rates that are typically higher. These factors make a jumbo loan very costly and risky, making it difficult for borrowers to handle if rates shift upwards.
7. Payment Protection Insurance
Mortgage companies and credit card companies love to market payment protection insurance policies, but do you really need them? Usually, the policies are overpriced, have many exclusions and cover few circumstances. Instead of buying into payment protection insurance policies with few benefits, why not use the money to create an emergency savings fund?
8. Extended Warranties
I normally do not pay for an extended warranty. I’ve never had to make use of one and have been happy about avoiding the extra fees that come with a warranty. But there may be situations wherein a warranty may be worth your money, particularly if it covers big ticket items. Some warranties involve paying certain costs, shipping the item or visiting a faraway location to get service. In these situations, it might be more affordable and timely to pay for a local technician to repair the item. For small items, extended warranties are usually a waste of money. Why not just buy a replacement, rather than waiting for repairs to be made under warranty?
9. Certain Insurance Products
Some insurance products may be “overkill”. Pet insurance, travel insurance and wedding insurance may not be necessary in most cases, though in certain circumstances, could be worth the premium. But how about cash value life or universal life insurance? I am partial to term life insurance, the cheapest form of life insurance available. I prefer to address my investments independently of my insurance needs.
Also, why would you buy life insurance for your children? Life insurance is intended to replace the income of a family breadwinner. Unless your child is supporting your household, life insurance for children is a waste of money. You’re better off establishing a high yield savings account (such as those offered by HSBC Direct) for your child, buying savings bonds and planning for their college education rather than purchasing life insurance for them at such an early age.
10. Annuities For The Young
You may get a sales pitch from an insurance company about the wonders of annuities. But keep in mind that annuities are basically “retirement products” that try to control your investment risks, as they attempt to provide you an income stream in your later years. In exchange for higher costs and lack of liquidity, annuities offer your investments some protection from risk along with tax deferral, but you can achieve the same thing with proper asset allocation, diversification (minus the costs and lack of liquidity!), and by investing in traditional retirement accounts.
11. Pay Day Loans
It may seem like an easy and convenient way to score some quick bucks, but pay day loans are a very bad deal. When you’re in a bind, you may think it’s your only way out, but realize that payday loans come with a very high price. Many payday loans cost a minimum of $20 per $100 borrowed. Imagine this: if you borrow $500 today, you will have to repay $600 at a later point. If you can’t repay the loan, you’ll wind up extending the terms and paying even more fees! This can create a vicious cycle of high-cost payments that you never catch up with.
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