We’re officially in a recession and our budgets are being stretched to breaking point.
With this in mind, the last thing you want to do is fork out what little money you have left to greedy corporations.
We list the ten biggest rip-offs to avoid.
#1 Inverse order of payments
Did you know that your bank manipulates your credit card repayments in order to maximise the cost to you (and the profit for them)?
It’s known as the inverse allocation of payments, which basically means that any repayments you make go towards the cheapest debt, leaving the highest interest-earning portion until last.
Many credit cards on the market today are designed specifically to catch you out in this regard. How?
By offering a lengthy 0% balance transfer deal combined with a short term new purchase offer, designed to tempt you into spending on the card as well. Once you do that, the banks have you exactly where they want you.
Let’s assume you switch £3,000 debt to your new credit card, which offers 12 months interest free on transfers and three months on new purchases. You then have an unexpected £1,000 expense which you can’t immediately cover, so you put it on the card and plan to repay it before the 0% new purchase offer expires in three months time.
But when you do repay that debt, you’ll find those funds went towards the balance transfer instead. So after three months you still owe the £1,000 from that new purchase, and it is now earning interest at a rate of anywhere between 16% and 19%.
Before you can even begin to repay it, you have to clear the £2,000 remaining on your balance transfer.
There are two ways to avoid this trick: Either choose a card that offers identical new purchase and balance transfer deals, such as the Halifax One Card or simply use a separate credit card for each.
#2 Cash withdrawals on credit cards
Use your plastic for a cash advance and you will be hit with a double whammy. Not only do lenders charge a 3% fee up front, but that withdrawal will also earn interest at a massively hiked interest rate – usually between 25% and 30%.
And of course, because of the inverse order of payments mentioned earlier, you will have to clear all other debt before you can begin paying it off.
There isn’t really a way to make cash advances on credit card affordable, so it should be avoided at all costs.
#3: Extended warranties
Extended warranties cover you for any repair costs you may need on a purchase. You can buy a policy to cover anything from TVs to cars, but they are primarily used for electrical goods.
So why is it considered such a terrible financial product? For starters, it is largely pointless, as you’re already protected against buying faulty products by the Sales of Goods Act, which states traders must sell products of satisfactory quality or the customer must be compensated.
Furthermore, many products come with a manufacturer’s warranty that covers you for up to 12 months anyway.
Like many insurance policies, extended warranties can also come with a host of exclusions, such as wear and tear or accidental damage. And finally, your home insurance policy may already provide the cover you need.
Given its limited usefulness, you would expect it to be spectacularly cheap, but it is actually extortionately expensive, with policies costing anywhere up to 50% of the product you’re looking to cover.
In short, the only person who benefits from extended warranties is the company selling it, and you should definitely avoid it. However, if you really feel you need it, be sure to shop around for an independent policy rather choosing your seller’s own version.
#4: Foreign transaction fee
Banks rake in almost £60 million a month during the peak summer period by charging customers for using their credit and debit cards while abroad.
Research from Travelex shows holiday makers using their cards in the shops incurred transaction fees totalling £43.6 million, while those who withdrew local currency at ATMs wasted a further £14.4 million.
The reason why using your card while abroad is so expensive is that the vast majority of banks charge a hefty 2.75% fee whenever you make a purchase in a foreign currency.
An attractive alternative is the pre-paid travel card, which works just like your bank card except that you can load it up with foreign currency, allowing you to avoid the 2.75% foreign transaction fee altogether.
#5 Your lender’s PPI
In these uncertain times, payment protection insurance – a policy which promises to meet your repayments on a debt should you become unable to – is becoming increasingly popular, especially with unemployment rising sharply.
However, it’s important you don’t simply accept your lenders own policy when taking out credit, as these are always far more expensive - a report written by the Competition Commission last February found that banks were pocketing around £1,200 from a policy that costs them just £20.
So always shop around, and always include independent providers in your search.
#6: Standard energy tariffs
If you are looking to cut your energy bills, it’s not just suppliers you should consider switching, but also tariffs.
Specifically we’re talking about the online tariff, which can work out up to 15%, or £155, cheaper than the standard offering.
#7: Miserly current accounts
Most high street banks pay a miserly 0.1% credit interest on their current accounts. In these difficult financial times its essential you make the most of every penny you have.
So switch to a supplier offering a more attractive rate – Alliance & Leicester's Premier Direct pays an impressive 6% on the first £2,500 in the account.
#8: Insurance policy renewals
Figures from price comparison site Confused.com suggest that shopping around can save you an average of £208 on car insurance, and a further £186 on home and contents cover.
You can reduce your premiums further by paying for your policy annually rather than monthly and by taking advantage of discounts for buying online (these can be as high as 25%).
#9: IHT
Lack of inheritance tax (IHT) provision represents the single largest tax wastage in the UK, totalling £1.9 billion last year.
According to Unbiased.co.uk, the main cause of "death tax" wastage is the inclusion in personal estates of the proceeds of life assurance policies, which if written in trust, would not be subject to inheritance tax.
“IHT is often lost through not writing life assurance policies in trust, not thinking about inheritance tax allowances and, worst of all, by not making a will at all,” says Unbiased.
#10: Hidden broadband charges
More than one in four broadband users are hit with unexpected charges that cost them an additional £36 a year on average.
According to Moneysupermarket.com, levies on paper billing, non-direct debit or late payments and installation are earning Internet Service Providers around £160 million a year.
The main reason why customers are unaware of charges is because they don’t pay enough attention to the contracts they sign. It’s never going to be scintillating reading, but taking a few minutes to properly understand your contract could save you up to £51 a year.
