Six Horrible Financial Products You Should Avoid
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Dealing with financial products can be very confusing and stressful, but there are some products that you should absolutely stay away from for the sake of your financial health. Here are a list of six things I think people should avoid.
1. 401 Debit Card
This is a fairly new product that is designed to let people under age 59.5 raid their retirement funds at an ATM. This is a horrible idea because it makes it easy for people to destroy their nest eggs. Early withdrawls carry a 10% penalty plus tax expenses so $10 withdrawn from a 401k becomes $6 to $7. In the past it took at least a few forms to do an early withdraw from a 401k, and it is not worth the effort to fill out a form for every $5. However, a debit card just makes the process of withdrawing small amounts so easy that I could see people spending their entire 401ks without even feeling it. If you want to read more, Jeremy at Generation X Finance had a great article on this topic .
2. Credit Cards with Maintenance Fees
There is absolutely no need to get a credit card with a maintenance fee these days. In the past when credit cards was a new product most of them had maintenance fees, but now very few charge them. I am surprised that companies still issue ridiculously bad cards.
3. Store Credit Cards
Store specific credit cards are those that can be used only at the store where you signed up. Do not be enticed to sign up for these cards even if the store gives you 30% off on the day you sign up. The reason is that they generally have very high interest rates and could lower your credit score. These are different from a co-branded credit card that can be used anywhere. Co-branded cards generally have better rates and better internal controls than store specific cards. (See also: Store Credit Cards That Don't Suck)
4. Payment Protection Insurance
These are insurance policies marketed by credit card companies or mortgage companies that insure you against debt payments if you become ill or lose your job. It sounds good right? The truth is that they are usually quite overpriced, and the policies have so many exclusions that very few benefit. You are probably better off if you took the money you would have paid for this insurance and saved it in an emergency fund. In the UK these insurance policies were investigated for over two years, and the consensus is that these products are highly lucrative for the lenders and rarely benefit the consumer.
5. Payday Loans
These are loans given for the amount of your future paychecks, and they carry ridiculously high interest rates disguised as a fixed cost. If you calculate the interest rate it is often hundreds to thousands of percentage points. I think if you really need the money a low interest credit card is usually better than these loans because you can pay a credit card at the next statement date and your rate would be lower. You can read about Linsey's experience with payday loans.
6. Any Financial Product You Don't Understand Fully
Any financial product could be a potential disaster if you do not understand how it works and how it benefits you. For example, a lot of the current sob stories relating to foreclosures involve borrowers who did not understand how their mortgages worked. All they saw was their initial mortgage payment and did not understand how the payments would adjust. I did not place mortgages specifically as a bad financial product because all the mortgage options I have seen could be used correctly to the benefit of homebuyers. The lesson here is that before you lay your money on the line for any financial product, you must research it and read the fine print. If you do not do your due diligence, a product that is potentially beneficial to others could be a nightmare to you.
What are some of your horror stories involving bad financial products? Inquiring minds would like to know!
Tagged: Credit Cards, 401k
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I think that store cards can be good when used properly. A lot of stores give you extra discounts for using their credit card. If you use the card and pay the balance in full every month you can actually make money from these cards. The key is paying the balance off in full. For instance, I've had a Gap credit card (with a 25% or so APR) for years and have never paid any interest because I pay the bill in full every month. Every time I spend $200 I get $10 back. I also get extra coupons and discounts now and then. For me, it's worth having and using this card.
I agree that you need to be careful with the store cards I agree with Jen's comments too. From a money savings perspective, you can sometimes get a very very good deal, save a ton of money, by taking the store card. When the bill arrives, pay it in full.
As far as credit insurance is concerned, there are pros and cons. Each persons situation is different so for one it might be a very good idea, but for another person, it could be a poor idea.
I have several store cards and have found that they do not decrease my credit score but have actually helped it over the years. Here is how I use my store cards:
- Only use them when there is a discount offered for using the store card; such as "use your Macy's card and get 20% off your total", etc.
- Then after my transaction, I pay my balance at the register. Sears, Macy's and JcPenney's allows this and other stores may also. Or I go home and pay online. Reason being, the interest rate on store cards are set at around 21% and should be paid off before interest accrues.
Another good reason to have store cards is that you get coupons in the mail. I get coupons periodically from Macy's and they include anywhere from $20 off a $60 purchase and 50% off any item, etc.
Another nice thing about store cards is that quite often, you have a year or more of no interest and no payments. Bank credit cards, even when they have 0% offers, still require monthly payments and often have a 3% transaction charge upfront. After we moved into our current house, we needed some new furniture, and between Macy's, Rooms to Go, and Home Depot, we floated about $10,000 in purchases for a year and a half. We could have just paid for the stuff with the cash we got from selling the old home, but instead we were able to let it sit in money market accounts and earn about 5% interest. We also got a discount for opening the Macy's card. Finally, any detriment to our credit scores caused by these cards was irrelevant, since we had just gotten a mortgage and wouldn't be applying for any other credit anytime soon.
a 401k debit card has to be the most unethical thing I've heard in a LONG while! I recently posted too how to stay away from those payday loans. It really irks me that they are outside every military installation ad nauseum.
This is a good article (like usual) coming from you! I especially like that you brought up store credit. While I had never considered this being a bad product before, I now can see why it can be for some people. An example is when I had a Von Maur account as a youngster... the worst part of it is that is was my ONLY line of credit. I would buy underwear at $25 a pair, not because I needed or wanted them, but because it was the only way to buy them on credit. Had I thought about it more, I could have saved up $4 and snagged a 6-pack of Hanes at Walmart.
They also never required that I had my card on me. By just telling them my social and showing them I.D. I could charge whatever I wanted, whenever I wanted. (Even though I had shredded the card in an attempt to curb spending months ago....)
Thanks for the link-love!
Linsey Knerl
Short vs. long term. Store credit dings you in the short term. But it can build your rating over the long haul. But, if I'm going to take a ding in the short term, I'd rather have the flexibility of something like an AmEx Blue Cash than a Gap card. Flexibility is good.
I think mileage cards are generally terrible. You get locked to one airline and it's partners, and the rewards for miles have been steadily dropping. You look at the spend through for many rewards, particularly mileage, and you're better off just buying the reward in the first place. Not always, but many times.
I think even 401K loans are bad idea and anything that makes it easier to steal from yourself is bad idea. What on earth are these financial institutions thinking? They are pushing people toward poverty.
Never borrow against you 401K... ever. It should only be done in the most exteme emergency. A death maybe. Don't even do it for a foreclosure. You're just burying yourself deeper into debt when you can't afford the debt you have.
I already have many store specific credit cards, should I close all those? I understand after reading and will not open any new credit card that are store specific, but whatever I have today, if I close those will that improve my credit status?
Be careful about closing credit cards, especially numbers of them at once. This affects your available credit amount and will cut it back noticably. If you are carrying balances on some cards, suddenly you are using a larger percentage of your available credit. It could have a detrimental effect on your credit score for a while. If you are planning to try to borrow money for something important soon, it could raise your interest rate. Be cautious.
Thanks for all the feedback! I'm not sure if cancelling store credit cards would help your credit score, but it may help you from being an identity theft victim. One thing I didn't mention is that stores generally have less security measures in place than major banks and financial institutions. Oh, and I'd like to present a really funny comment on digg about this article by a guy named GhostBoy:
So there you have it, a payday loanshark admits that he sells the dealiest product out there.
Unbelievable - that is truly one of the worst ideas I have heard of in a long time. I'm glad you lumped it together with payday loans.
On payday loans, Oregon like many states recently passed legislation to cap payday loan interest rates at 36%. In turn, many payday lenders are trying to get their license changed from a "payday lender" to a "consumer-finance" lender, which only stipulates that the borrower has 61 days or more to pay that type of loan back. That type of license has no cap - these types of lenders have been known to charge 372% according to this article:
http://wweek.com/editorial/3228/7557
Slime, slime, slime.... :)
here's a MSN article that says store credit cards will lower your credit scroe:
Along the lines of payday loans is the "Instant Refund" loans you get at the big tax prep firms. You know, "I got people."
More like "I got charged 3600% interest on money that I loaned to the government for 0%."
high rates on refund anticipation loans
Buyer Beware!
Consumerist has a story today about a WSJ article on pay day lenders. There are some of them that are snaring senior citizens and the disabled into pay day loans when they need money but then end up taking control of their social security checks. The pay day lender works with the persons bank to take the check. Then the pay day lender takes what they want and give the person what is left.
I am just speechless about how horrible that is. It should be illegal.
I don't think store credit cards are in the same category as other items. Store cards can be OK 1) if you open them to get a discount, then never use them again or 2) if you often shop at a particular store and get some benefits for having the card like coupons or cashback. Needless to say, you can only use them if you pay your balance in full, but to me this is the only way to use credit cards. I don't care about their rate - it could be 99.99% for all I care, never paid it, never will. I do have a couple of store cards: one is from a store I often use; another one I got to get a discount and never used again. I just got amazon, but it is a co-branded card, and I often shop there. I am far from poor, but I like free money.
Totally agree about the rest.
I've only found out about payday loans recently - read a mention on a blog. I understand that their default rate is probably high, which could in part explain high rates, but 1000% is ridiculous. Wish someone paid me that on my investments. And here I thought loan sharking was illegal...
Home equity line of credit credit cards!!! What a horrible idea is that? Borrowing against your house and then using it as a credit card. If you default, your house gets foreclosed. A home equity loan is much safer since it's a one-time lump sum, but the home equity line of credit on a plastic card is just a disaster waiting to happen. I can see someone frivolously spending it without even realizing it.