How to avoid tricks of the financial trade
To get the best bank and insurance deals, you need to be let in on a few secrets, says Kate Hughes
Saturday 06 September 2008
Keeping hold of your cash is hard enough in an economic climate like this, but banks and other financial institutions feeling the pinch are stepping up their efforts to keep hold of as much of your money as they can. There are a wide range of cunning ploys to maximise the amount financial companies earn from the regular punter. These are just a few of the details in the small print that they don't want you to notice.
Between them, the main credit-card providers use between 10 and 12 different methods of calculating interest. So, for starters, there is no level playing field. But one of the best money-earners for the lender simply comes down to the order of payments on to your account, particularly when it comes down to transferred balances. Because many banks lure you in with a low, or zero, interest rate on balance transfers, any payments you make against your debt will first be used to pay off transfers – the debts the bank isn't earning any money on. Any purchases made using the card, however, will usually be charged at a standard interest rate, and won't be paid off until you've paid off all of your free borrowing, racking up interest for the bank all the time.
Meanwhile, if you don't pay off your balance in full every month, you will often be charged interest on the whole balance, rather than simply what is left. If you owe £1,000 for example, and you pay off £999 of that, you would be charged interest on £1,000, not £1.
Banks are continuing to appeal the decision to let the Office of Fair Trading determine unfair borrowing fees – in a bid to delay having to pay back fees collected in the past, as well as extend the opportunity to collect new fees from customers. Check the order in which money comes in and goes out of your account, as banks will often process money coming out before crediting your a count with money going in on the same day, which pushes your balance closer to any limits. And charges inflicted by the bank may push you into unauthorised-borrowing territory, which will incur further charges, even though it was the bank's actions that caused the initial problem.
"You can usually have these charges refunded, but that depends on you taking action, which few of us do," says Kevin Mountford of Moneysupermarket.com "Banks rely on inertia to keep their margins healthy, so customers should review all their rates, terms and conditions every 12 months to make sure they are getting the best deal for their cash."
Another classic trick is to lure customers in to a current or savings account with a high headline rate, before gradually cutting that rate, relying on consumers either failing to notice, or failing to act. Every time they reduce the rate, without losing your custom, the bank makes money. And beware if you have to dip into a savings account. Even if it is instant access, the small print may reveal that withdrawing cash will reduce your great rate of interest to virtually nothing across your entire balance.
Fee-charging accounts often trumpet valueless features, like ID-theft cover up to a certain amount, implying a saving when you should be covered anyway under the bank's operating regulations.
Mortgage lenders frequently charge you interest annually or monthly, rather than daily. You'll pay interest on the outstanding loan from the beginning of the year, regardless of the fact that you have paid a chunk off through the last 12 months. Essentially, you're paying interest on money you don't owe.
"There are several ways in which lenders get more money out of us; the most obvious is by charging interest on an annual rather than daily basis," warns Melanie Bien, director of independent mortgage broker Savills Private Finance. "This is an outdated way of doing things, but lenders such as Bank of Ireland and Bristol & West still charge interest annually.
"It means that what you pay in interest is based on the outstanding loan amount at the end of the previous 12 months, so payments made during the year sit in your mortgage account rather than cutting the debt and interest. What you owe isn't reduced until the end of the year."
Another expense to watch out for is the lender's arrangement-fee when you re-mortgage on to another deal. "You pay this even if you stay with the same lender, although you may get a free valuation and free legal fees," says Bien. "When switching deals, most lenders also charge a mortgage administration, or exit, fee for closing your account. This varies between lenders – some, such as HSBC, don't charge one, while Alliance & Leicester charges £295. Lenders should tell you what this is before you sign up so you add it to the rate and other fees when comparing the cost of various mortgages."
Covering your assets
Insurance policies are notorious for endless exclusions and conditions, often rendering your policy void, and leaving you penniless, if you have cause to claim. When applying for protection policies like life insurance, income protection and critical illness, always include everything – every doctor's visit and all your treatment. Failing to disclose these details could mean you get nothing if you have to claim, even if you are struck down by an illness that isn't related to the information you omitted.
Some holiday insurers will stipulate that you are only covered for activities that are professionally organised and supervised, and may also insist that suitable safety equipment is worn, and that appropriate safety measures are taken, warns insurers eSure. So, if you're looking to jet-ski, hire from a water-sports centre rather than just a man on the beach. Insurers may only offer cover for scuba divers down to a certain depth, hikers may need to stay below a certain altitude, and motorcyclists might need to have held a clean licence for a specified number of years. If you jump on a moped on a Greek Island with no helmet and no clue, only to be clipped by a truck, your policy is unlikely to pay out.
Paying the piper
If, after all this, you still have a few pounds to invest, you may have to pay through the nose for any decent returns on your investments thanks to changes in regulation that now allow fund managers to take more of your money in fees if the fund beats a pre-specified benchmark.
An asset manager will charge you an initial fee, and an annual management fee as standard, but your investment may get hit by a performance fee of as much as 75 per cent if they do their jobs well. You take the hit if your investment does badly and your fund manager rakes in the cash if your money performs well.
"Performance fees don't traditionally feature in retail funds, but they are starting to appear with more regularity," says Hugo Shaw of financial adviser BestInvest. "BlackRock's Absolute Alpha fund, for example, introduced performance fees some time ago. This is a fund that continues to do well despite the market. But you have to watch out that some managers don't introduce higher and higher levels of risk because they are going after the juicy performance fees.
"Some of these fees are high, and obscene amounts of money are being made by some managers. Of the funds that do inflict performance fees, an annual management fee of 2 per cent with an additional performance fee of around 20 per cent of a return above a certain threshold is typical. Investors must check the details so they don't get caught out."
Five more traps to watch out for
* Don't withdraw cash on your credit card unless you have to. Not only will most providers charge you a big fee , but you'll also be charged a higher interest rate than usual. Some charge as much as 25 per cent.
* If you're thinking about taking out a loan, don't be seduced by the headline rate. Although lenders must offer their "typical APR" to two-thirds of all successful applicants, there's a high chance they'll turn you down. Check your credit record first and apply for a lender who you've got a good chance with.
* HSBC says it won't charge you if you accidentally bust your overdraft limit once a year. Its "fair fees" policy says busting your limit will be treated as an "informal overdraft request", and you'll be given one of these for free each year. What it doesn't shout so loud about is that it now forces you to have an overdraft review every year, which automatically uses up your free credit.
* Most mobile-phone companies still charge a fortune for calling 0800, 0845, 0844, 0870 and 0871 numbers, which are meant to be low-rate. Find out if there is a regular equivalent by visiting www.saynoto0870.com
* Insurers will charge you a hefty rate of interest if you pay your premiums on a monthly basis. If you can afford to pay your car or home insurance as one lump sum, you could save yourself hundreds.
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