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. The 401k 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 Early withdrawls carry a 10% penalty plus tax expenses so $10 withdrawn from a 401k becomes $6 to $7.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 that charge 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 such as this card that charges a $150 yearly fee plus a $6.95 monthly fee.
3. Store specific 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 cobranded credit card that can be used anywhere. An example of a cobranded credit card is the Costco Amex Card, which can be used outside of Costco. Cobranded cards generally have better rates and better internal controls than store specific cards.
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. Another horrible product in a similar vein is the tax refund anticipation loan. Linsey has good articles on both payday loans and the new tax refund anticipation loan .
6. Any financial product you do not 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.
Well, that is my list. What are some of your horror stories involving bad financial products? Inquiring minds would like to know!
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