Photo: Flickr via jmsmith000
Personal finance isn’t supposed to be a risky venture.It’s not like sky diving, bungee jumping, or even a crazy night in Las Vegas, throwing caution (and money) to the wind. We like to know that investing our money is safe, tucked away secure in our bank accounts (it’s the sole reason why we’ve got the FDIC). Banking, in a word, is supposed to be simple: Deposit money, earn interest, repeat.
Yet time and again, consumers fall for financial products that may actually lose them money instead of build it. And it’s not just a penny here or a dollar there. Some banking incentives can be downright dangerous to our financial well-being, causing us to lose out on thousands of dollars over the course of several years. By the time we’ve realised it, catching up can become a futile task.
From the trendy, newfangled incentive to the longtime bank offer, here are some financial services best avoided.
1. The 10-Year CD
Unless you’ve got the best patience in the world (or, you won’t miss your money), don’t invest in a 10-year CD, a colossal waste of time and money. Certificates of deposit are a great investment tool if you’re looking to stash some cash for several months. That’s why CDs offer higher interest rates than a conventional savings account — in return for locking their money into a CD, depositors are rewarded with better dividends.
But there is such a thing as taking “long-term CD” just a bit too seriously. Six-, 12- and 24-month CDs are practical, short-term savings packages, but anything longer is really pushing it. That 2.57% APY may be attractive on a 2-year CD, but on a 10-year certificate, you’re locked into the same rate for an entire decade, and there’s nothing you can do about it.
In 10 years, going CD rates may be double, but your bank account is stuck in 2012; there’s no way to “refinance” or take advantage of new rates. Close your account, and be penalised with fees. Combined with inflation, what your CD account was worth in 2012 or 2013 could be valued significantly less in 2020. And that’s 10 years of your financial life you can never get back.
2. Bank incentives, new cars and other “gimmicks”
Say you open a savings account at a local bank and are presented with two choices: Earn interest on your account, or forfeit your dividends for that shiny new sports car parked outside in the branch lot. Admit it — that new car sounds so tempting you had to think about your answer. Proven earlier this year by the Florida bank who offered customers a new Mercedes in lieu of CD interest rates, it’s a bad idea to opt for what’s behind door number two when interest rates will do just fine.
Banks are businesses like any other, with bottom lines and overheads to consider. So, automobiles and other non-cash prizes are used to woo new customers, who don’t realise that an expensive gift isn’t worth as much in the long run as their interest rates will be in time.
NerdWallet puts it succinctly: Interest on a good 5-year CD can earn more money upon maturity than most cars on the market today. (Taking into account the depreciation of cars, that says a lot.) The same goes for other shiny gimmicks and bank giveaways, like iPads and frequent flier miles, whose cash value of barely three or four figures a piece can’t match the dividend-raising power of good ol’ interest rates.
3. Sign-and-Drive auto loans
The “sign” in Sign and Drive is the endorsement of an auto loan contract in which a consumer only pays some state taxes and licensing fees up front at a car dealer. The “drive” means taking home the car without needing to pay attention to all those other unnecessary details, like down payments. Who needs those?
Sign-and-drive deals are like all things in life that are too good to be true — they always are. What many motorists dazzled by such auto loans don’t realise is that the money they’re not putting down, up front, gets loaded onto their monthly car payments. It may seem sweet now, but just wait until your first bill arrives in the mail. On top of that, there are lots of other restrictions, like lease terms and other fine print expenses that can come back to bite you in the driver’s seat.
4. Prepaid debit cards
Like its cousin, the prepaid calling card, the prepaid debit card won’t put you into debt like a credit card (because you’re putting your own money on the card before spending it). Though financial illuminati like Suze Orman tout the benefits of the prepaid debit card, user beware — using one can set you back big time monetarily.
FOX Business recently cited a Consumer Reports study which found that most prepaid debit cards are overloaded with fees, fees and more fees: “Activation fees, monthly fees, POS transaction fees, cash-withdrawal fees, balance-inquiry fees, fees to receive a paper statement or call customer service, bill-pay fees, inactivity fees, and overdraft or ‘shortage’ fees.” If that’s not enough, it’s also been reported that prepaid debit cards offer little in the way of consumer protection, especially if your card is misplaced or stolen.
5. Credit “repair” programs
The fact of the matter is, if you find yourself with bad credit, the only person who can repair it is you. Like the infamous “FAKO” score, there are a lot of disreputable and scammy companies that will take your money with the false promise that a newfound, flawlessly high credit score is yours to keep. According to ABC consumer reporter Elisabeth Leamy, many of these credit repair outfits utilise what’s called bombardment, flooding TransUnion, Equifax and Experian alike with paperwork disputing every minute detail in a person’s credit report. But by doing this, she says, they try to bully the bureaus into dropping negative entries.
Another is called file segregation, where a credit repair company conjures up their customers a new Social Security number and financial identity. If this sounds illegal, it is — Leamy says file segregation can violate up to three federal laws. She says that other credit repair scams are much more straightforward, simply taking your money and vanishing.
By keeping some of these tips in mind, you won’t have to worry about this happening. Choose better bank products, like savings, checking and loans from trusted banks and credit unions, and avoid teetering on the edge of the unsafe banking cliff.
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