Insurance renewals, standard tariffs, mobile phones: how businesses are using us as cash cows

Most businesses have specific services or products that are especially profitable for them. How many of these cash cows are you contributing to?

One of the worst rip-offs in all of personal finance looks to be on the way out, as this week the Financial Conduct Authority (FCA) finally announced plans to tackle the ‘loyalty’ penalty paid by insurance customers.

But it’s certainly not the only example of financial firms treating its customers like cash cows. All too often people like you and me are milked for extra cash, paying through the nose in order to subsidise cheaper deals for other customers.

Here are just a few of the ways that businesses take advantage of us ‒ and what you can do to battle back.

The rising cost of renewal

Let’s start by looking at insurance renewals. Providers tempt us in with a low initial offer, but then over time ‒ should we stay with that insurer ‒ we see those monthly premiums cranked up year after year. 

It’s something that the FCA is finally looking to act on, proposing new rules this week that would ensure that when someone renews their home or car insurance, they would pay no more than if they were a brand new customer.

It criticised providers for targeting price increases on those customers who are less likely to shop around each year to find a new deal, as well as using “practices that make it harder for people to leave”.

While it’s welcome that the authorities are finally doing something to try to tackle these tactics, the fact remains that we can reduce the chances of being caught out by these unnecessary price rises by being a bit more proactive with our insurance policies, taking the time to shop around each year and compare quotes rather than taking the easy option of simply renewing year after year.

Standard equals expensive

It’s a similar story when you look at energy tariffs.

Providers entice households in with the offer of a year or so where the price is fixed. But when this period comes to an end, we are moved onto the provider’s standard tariff.

These standard tariffs are the most expensive around ‒ indeed they are so costly that these are the premiums subject to the price cap introduced by energy regulator Ofgem.

To put into context just how pricey they are, according to data from Ofgem the average standard tariff costs £1,125 per year, while the cheapest new tariff costs just £812 per year.

The price cap was introduced effectively to limit the scale to which providers can rip off those households that don’t shop around at the end of each fixed period for a new tariff.

But it can only be so effective; you can ensure you aren’t being milked for money by providers by moving to a new fixed tariff when your deal comes to an end, rather than allowing yourself to be moved onto the standard tariff.

Don’t delay with remortgaging

When you take out a mortgage, you sign up to a fixed or tracker period for a couple of years. But when that period ends, you move to your lender’s standard variable tariff (SVT).

And these share more than a similar name to the standard tariffs employed by energy providers ‒ SVTs are a massive rip off as well. These rates are set by the individual lenders, and can be hiked at any point irrespective of what’s happening with bank base rate. 

To put that into context, according to the latest data from Compare The Market, the average SVR currently stands at 3.66%.

Yet the average two-year fixed rate is now 1.40%, which would mean a significant difference in terms of your monthly repayments and therefore how much it eventually costs you to pay off the loan.

Of course, there is inevitably some hassle involved in remortgaging every time your fixed rate comes to an end, from searching for a new deal to shelling out on the legals, but overall it will mean you pay less.

But I’ve paid for it already

Recent years have seen a new scandal involving mobile phone bills emerge.

You see, for many of us our mobile phone bills are made up of two portions ‒ one goes towards the actual tariff (the calls, texts and data), while the rest goes towards paying for the handset.

When that initial contract ends a year or two down the line, the handset has been fully paid off. But too many networks are taking advantage of the situation, meaning that we don’t see the monthly bills fall to reflect that.

Research by consumer champion Which? suggests that this particular rip-off is leading to a whopping £182 million being overpaid by victims, in some cases costing people as much as £400 a year.

Regulator Ofcom has gone with the softly-softly approach, encouraging networks to resolve this themselves, and it’s led to an incredibly mixed response.

For example while O2, Tesco Mobile and Virgin Mobile customers will be moved to the cheapest available, 30-day SIM-only deal, Three has refused to do anything at all.

Again, the simplest way to avoid being ripped off by a mobile provider is to make a note of when your contract comes to an end and then shop around for a new deal.

If you love the handset, you can almost certainly save a few quid by going for a cheap SIM-only deal. 

For more read Mobile phone bundle overpayments: scandal costing some hundreds per year.