As the old saying goes, “all that glitters is not gold.” In fact, you can find rocks called fools’ gold because they look as if they contained flecks of gold but it’s only iron pyrite. Unfortunately, the same is true of financial products as there are some that are fools’ gold in that they either cost more than they save, offer very poor value for the money or turn out to be just worthless. Here are 12 of them.
1. Extended warranties
Aren’t you offered an extended warranty just about every time you buy something electronic? If not, you’re the member of a very small minority. Just about every retailer that sells electronic stuff offers extended warranties to ensure “peace of mind.” But in electronics, there’s a thing called, believe it or not, “infant mortality.” This is a shorthand way of saying that if anything is going to go wrong with that electronic gadget, it will happen within the first few months and when it’s still under warranty. If that new TV gets past the first year, it’s liable to last until you’re ready for a newer, bigger one. In fact, statistics show that only 2% of TVs need repairs in the first five years. Plus, that wonderful extended warranty may not even cover some types of damage.
2. Charity credit cards
These cards let you give as you charge – which certainly seems like a good thing – as it costs you nothing extra. They way they work is that they automatically donate some portion of each of your transactions to your favorite charity. Some of these cards are branded with the name of the organization such as Chase’s Wildlife Fund cards and Bank of America’s American Heart Association cards, while others permit you to direct your donation to the charitable cause of your choice. However, many experts say that they don’t represent the best or most efficient way to donate to your favorite charity. The reason for this is that on the average, a nonprofit organization will get only a half a penny for every dollar you spend on one of those cards. When you charge $100, the company that issued the credit card will give $.50 to charity. If you charge that amount every month you’ll have donated only six dollars after a year. This means that you’d probably do better to donate directly to your charity every month and use a standard cash back credit card instead.
3. ID fraud protection policies
These policies say they cover fraudulent transactions on your bank account. However, the banks themselves cover their customers for losses as a result of fraud unless it can prove that you acted with gross negligence.
4. Over-50s insurance plans
These insurance plans pay out a lump sum at the time of your death. But in most cases what they pay out is less than you could have saved in an IRA over the same period of time.
These are credit cards that are accepted only by healthcare professionals and must be used for medical expenses. In some cases, they can be just what the doctor ordered. On the other hand, they can also make patients financially sick. There are cards available from companies such as CareCredit, which is a subsidiary of GE Capital Retail Bank as well as from Wells Fargo and Citibank. These cards are usually interest-free from three to 18 months. The downside is what happens if you don’t pay off your balance before your interest-free period expires. In this case, all of the past interest may be added to your balance and becomes your liability. When the interest rate does kick in – assuming you don’t pay off your balance – it can be as high as 27% or more. And because health care can be so expensive, it’s very easy to carry forward a balance, which can quickly become very high because of the interest expense.
6. Credit card protection
Credit card protection policies claim that they will cover you in the event your card is stolen. However, these services are already available from your bank or may be part of your homeowner’s insurance policy and at a cheaper price.
7. Expensive tracker funds
If you’re not familiar with tracker funds these are ones that let you invest in a group of companies and then follow their performance. However, some of these funds charge two or three times the normal rate to manage your money, which could very well eat into your returns.
8. Gift cards
One of these cards can be a good gift if you keep the value small. However, if the company goes bankrupt its administrators have no obligation to accept their cards and you or the person you gifted might be totally out of luck.
9. Credit monitoring services
There is numerous credit monitoring services available including LifeLock, TrustedID, IdentityGuard, etc. They all work about the same way, which is to track your credit report from one, two or three of the credit-reporting agencies – Experian, Equifax and TransUnion – and then send you an alert immediately if they discover suspicious activity. Many of them provide limitless access to your credit report from at least one of the agencies as well as credit score tracking, and even telephone support to help you with fraud resolution. However, when you see statements like “ $1,000,000 identity theft guarantee,” understand that this covers only your out-of-pocket expenses to get your identity restored such as lawyer’s fees, the cost of consultants, etc. but not any money you’ve lost. You could monitor your credit yourself just by getting your three free credit reports one at a time at three month intervals. And most credit card companies limit your losses to $50 in the event that your identity is stolen. So the cost of these services, which is usually $10 to $15 a month, is probably not a wise investment unless you’ve already had your identity stolen.
10. Payment protection policies
Credit card companies are infamous for offering these policies. What they purport to do is cover your payments in the event that you are unable to make them. However, these policies often come with a number of exclusions so it can be difficult to get a payout. Plus, they can be expensive. You would really be better off building up an emergency fund you could use to make your payments in the event you were unable to do so.
11. Department store credit cards
It can be very tempting to apply for one of these cards because they’re usually associated with a nice discount offer. “Apply for our store card today, and I can take 20% off the cost of that purchase.” The problem is that they usually have very low limits and high interest rates. You can’t use them anywhere but the store where you got them and they never come with any kind of rewards. They are not looked on as favorably as major credit cards when it comes to your credit score. The fact is you would be better off getting a major credit card with a competitive interest rate that comes with cash back or some other type of rewards.
12. Whole life insurance
This type of life insurance might be good for some people but not for most. An insurance agent will try to sell you one of these policies based on the fact that it builds cash value. However, in most cases you would not be able to afford premiums large enough to get a significant cash return. You’d probably be better off getting a term life policy and then using the money you save to invest in something that would generate a higher return over time.