10/12/2012 2:29 PM ET|
5 ridiculous rip-offs you can avoid
Unnecessary fees and exorbitant interest rates are just a few ways that companies go after your money. Be wary of these shakedowns.
Some purchases are notorious for being rip-offs. Popcorn or soda at the movies, for example. Anything from a hotel minibar. The "Total Recall" reboot.
But those expenditures are chump change compared with the real shakedowns millions of people face in the financial world. Banks, lenders, investment companies and other financial outfits are determined to fleece us out of millions, if not billions, of dollars.
Here are five of the biggest rip-offs to watch out for:
Excessive investment costs
Whether you'll have enough money for retirement depends on more than how much you save and which investments you pick. The other powerful factor is how much you pay for those investments (and any advice you get along the way).
Here's how the Labor Department puts it:
"Assume that you are an employee with 35 years until retirement and a current 401k account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%."
The more you put into your account, the more fees you'll pay over time. While some costs are inevitable, many people are paying too much.
Fees for 401k plans with less than $10 million in assets average 1.9%, according to the Government Accountability Office. People investing with full-service brokerages or in variable annuities can easily pay 2% or even 3% when all costs are considered.
There's no evidence that paying more gets you better returns -- quite the opposite. Small investors are far better off keeping costs to a minimum with low-cost investment options such as index funds. If you need help constructing your portfolio or managing your investments, consider hiring a fee-only planner who charges by the hour. You can get referrals from the Garrett Planning Network.
Capital One, Discover and American Express recently paid fines after the Consumer Financial Protection Bureau accused the lenders of using deceptive marketing practices to sell various credit card add-ons, such as credit insurance that promises to waive minimum payments or pay your balance if you're unemployed or disabled. Consumer advocates have long called these contracts "junk insurance," saying the products are overpriced and full of hidden traps that make the coverage hard to use. The scrutiny has led other banks, including JPMorgan Chase and Bank of America, to start phasing out the products, which were once a $2.4 billion a year business.
Cellphone insurance is another product that's expensive relative to what you get. As Consumer Reports puts it, "Monthly premiums of $5 to $7 and deductibles of $25 for lesser-value phones to $199 for smartphones can add up . . . and the insurer might replace your phone with a refurbished model."
A better approach: Hang on to your old phone, and reactivate it if your new one is lost, stolen or broken. Remember, insurance is best used to pay for losses you couldn't cover out of pocket. If you can't afford to replace your phone, you're buying too much phone.
Other insurance to avoid includes "dread disease" policies, which cover only the disease named in the coverage and not related conditions, and life insurance on kids. The policies pushed by Gerber and other companies are unnecessary and a poor investment. "In 20 years you'd pay $1,602 in premiums for a $10,000 juvenile policy," Consumer Reports notes, "but the guaranteed cash value would reach only $1,536."
More from Liz Weston:
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I have come to the conclusion that in the last few years most business are constantly devising ways to "cheat" you out of your money. Its not just the ones mentioned above. Its the majority of businesses out there. Deceit has become the new business format in America and its making owners millions of dollars. The consumer really has no protection any longer. There are not a lot of "laws to stop this practice"...only detours around it. If your lucky enough to know the "detour".
Pessimism and skepticism are healthy attitudes in these areas.
Several years ago I worked for Interstate Securities & Southwestern Investment company, All employees were told to sell the companies "Credit Life" insurance Disability Insurance and other items which we all knew that charged crazy Fees. did we know this was wrong YES. But it was part of the job. Does this still happen today, I BET IT DOES. Banks, Finance companies, Insurance companies are the worst offenders. Will this change NO, there is too much profit involved to stop these practices.
RE: Credit Card Insurance-
I think it was about three years ago that I needed to activate my renewed Capital One credit card by phone from my home phone#. After a considerable delay I think I got a third party salesman that made it seem impossible to renew this card without taking out the insurance. I explained to him that I was retired and never would charge anything that I couldn't pay in full when the bill came in. H e lied and said I would never be charged anything for this service as long as I kept paying my bill in full every month.
Next bill I was charged 1.5% insurance fee for every purchase I made.The only immediate solution was to just cancel the card and use another one although I never tried to get my $36.00 back.
Two months later I got a brochure in the mail that made it obvious that I would never have circumstances that would let me collect on credit card insurance.
Unfortunataley a lot of people aren't in a position to just pay it off and move on.
I thank God for Pay Day loan businesses. I know they can be misused but you can MISUSE anything. Im sorry but I don't find them any worst then borrowing from a credit card. Use your saving...really, come on. Borrow from your employer....do companies even do that anymore? And , my personal favorite....." a small loan from a credit union", if you had the credit to get a "small loan" you would not be using a Pay Day Loan business.
I have use this kind of loan before and to be honest it was a life saver. Once I wanted to schedule a trip but the sale was "today only" , it was on a Wednesday and I got paid on Friday. I got my payday loan, paid for my trip and when Friday came I paid the money back, without interest because in Texas you have a 3 day grace period where if payed on or before the 3rd day you only pay back what you borrowed.
Im not saying this is for eveyone....most things aren't (credit cards aren't for everyone). I believe they are needed and necessary and nice option to have.
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