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March 8, 2010 | Posted By: Kristin Harad
A Guest Blog by Kristin Harad, CFP®, Vita Vie Financial Planning
Congress continues to debate the creation of a Consumer Financial Protection Agency to more closely supervise credit cards, mortgages and other financial products. While the merits of that proposal continue to be mired in political wrangling, you will always bear the responsibility of looking out for your own best interests!
As a financial planner, my clients often ask my opinion on financial products that they are considering purchasing, and several of them always appear to me to offer dubious value. (Note: I don’t necessarily consider any of these products to be a ‘rip-off’, but generally have not found a situation where they are worth their price). So, here are five heavily marketed products that you may wish to avoid:
1. Life Insurance for Your Baby. These plans are very popular and seemingly low cost, but they violate the principal rule of life insurance – you should buy insurance if that person’s death would create financial hardship. Many of these policies tout they will guarantee your child the ability to purchase life insurance once they are adults, should they have a medical issue that would medically preclude them from doing so. But the odds of this problem are tremendously small, so don’t spend your money on ‘insurance so that can you buy insurance.’
2. High Fee Guaranteed Approval Credit Cards. If you are struggling with poor credit, the countless solicitations you’ll encounter for a ‘guaranteed approval’ credit card can sound like a tempting solution to regain the convenience of a credit card and perhaps begin re-establishing your credit. Be sure to check the fine print, though! Many of these cards carry outrageous fees and tiny credit lines. For example, one popular guaranteed card offers just a $300 credit line and comes pre-loaded with a $95 Processing Fee and a $75 Annual Fee. By the time your card arrives in the mail, you’re already an extra $170 in debt with just $130 in new spending power. A better alternative is a low-fee secured credit card that will report your activity to major credit bureaus and enable you to improve your credit score over time.
3. Credit Card Unemployment Protection. This one is marketed under a number of names, but usually allows you to easily enroll by checking a box on your monthly credit card statement. The offer usually sounds quite alluring, includes a free trial period and is incredibly easy to sign up for. My advice: Don’t! Most of these programs will promise to make or forgive your minimum monthly payments for up to one year if you are unemployed or disabled. This is very low value insurance for the $9.95 - $19.95 per month that these programs charge. Plus, should you find yourself unable to make payments, credit card issuers are currently more accommodating than ever in working with you to arrange a payment plan that you can afford. Take the money that you would spend on these over-priced protection programs and instead put it towards paying down your credit card balances!
4. Low Rate Long-Term Certificates of Deposit. As the economy still struggles to stabilize from the Great Recession, interest rates remain at historic lows. This makes things tough for savers, who want to get the best possible rates when they invest their cash. Certificates of deposit are an increasingly popular option for investors who are still wary of the stock market, but be wary of locking your money into long-term CDs with low rates. Bankrate lists numerous 5-year CDs with an average annual percentage yield of less than 2.5% and penalties for early withdrawal. Rather than locking up your cash long-term for these paltry returns, seek out higher yielding short term CDs or even money market accounts that will provide you with better liquidity.
5. Anything That You Don’t Understand. Financial products continue to grow increasingly complex, but one simple rule will consistently keep you out of trouble: If you don’t understand something, don’t buy it!
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