Forget Hallowe'en: These Are REALLY Scary!

If you fancy a fright, then check out these financial products. They're sure to give you a shock!

When buying a financial product, how do you know whether you're in line for a trickor a treat? Alas, there's no simple answer to this question, so it makes sense to investigate carefully before signing on the dotted line. All of the really important stuff -- the loopholes and pitfalls -- will be hidden away in the small print, which is normally fiendishly difficult to read. Hence, it pays to ask searching questions at the right time. Otherwise, you could get a nasty fright! In my two decades in financial services, I've seen hundreds, if not thousands, of products which would turn your hair white with shock. Here are five candidates for my Hall of Shame: 1. Costly credit cards Currently, the Bank of England's base rate is 5.75% a year, so British banks can borrow from the `Old Lady of Threadneedle Street' reasonably cheaply. So, what interest rate do you think you'd need to charge to turn a profit by lending to credit card users? Allowing for bad debts and administrative expenses, I reckon you could make a return charging no more than 9% a year. However, my recent research into almost three hundred credit cards revealed that banks charge cardholders far more than this. Indeed, the average rate for retail purchases is about 16.5% APR, which makes lending to plastic fans very lucrative indeed. For cash withdrawals and `cash-like' transactions, the rate climbs as high as 35% a year, which is daylight robbery. Thus, my advice to Fools is to avoid paying any interest at all for a lengthy period by switching your existing credit-card debts to a 0% credit card. I did -- and it feels great to borrow money without contributing a penny to banks' profits! 2. Cruel current accounts Nearly nine out of ten British adults (90%) have a current account, making it one of the UK's most popular financial products. The bad news is that the great majority of us have an old-style current account with one of the big clearing banks, which are Barclays, HSBC, Lloyds TSB and RBS/NatWest. As I warned in Watch Out For The 0.1% Trick, these outdated bank accounts pay extremely poor rates of credit interest (often, 0.1% a year), charge a fortune for overdrafts, and levy extortionate penalties on unauthorised borrowing. Of course, there is a solution to this widespread rip-off. By switching to a `new generation' Best Buy current account, you can slip into the red for less and earn cracking rates of interest while in credit. Of the hundreds of accounts on offer, my favourites are the Alliance & Leicester Premier Direct and Coventry First accounts, both of which pay more than 6% a year when you're in the black. 3. Managed funds I am a big fan of building wealth through long-term investment in companies, but I don't like to overpay for the privilege. Hence, I stay clear of what I call the `Ferrari factor': the high charges imposed by managers of actively managed investment funds. These charges can chop 2% to 3% a year from your annual returns. This explains why almost nine in ten fund managers fail to beat the stock market as a whole over the long term. Personally, I prefer to pay as little as 0.25% to 0.5% a year to track the whole stock market using an ultra-low-cost index tracker. You can learn more about these Foolish beauties in How To Become A Great Investor. 4. Second-rate savings accounts When choosing a home for your savings, it's vital to shop around for a table-topping rate of interest. Otherwise, your nest egg or emergency fund won't even keep pace with inflation (the tendency for prices to rise over time) after tax is deducted. Although there are over four thousand different savings accounts from which to choose, only a few make my Best Buy list. Indeed, given that perhaps 99% of savings accounts pay less than the Bank of England base rate, I'd happily deliver all but a dozen to the dustbin! For the record, my two favourite savings accounts for no-strings access and super-high rates of interest are the Icesave (6.30% AER) and ICICI Bank HiSAVE (6.41% AER) accounts. Both come with interest-rate guarantees, and beat just about every high-street account hands down! 5. Standard variable rate mortgages Here's a similar question to that I asked in my point 1. Given the base rate is 5.75% a year, what rate should you charge to make a profit from a mortgage? Again, allowing for low levels of bad debt and admin costs, I reckon that 6.75% should be more than enough. However, back in the real world, mortgage lenders charge far higher margins on home loans. In fact, instead of charging 1% above base rate, many lenders add a margin of, say, 2%. This bumps up a typical lender's standard variable rate (SVR, the rate paid by all borrowers who aren't on a special-rate deal) to 7.75% a year. For example, the Halifax -- the UK's biggest mortgage lender -- has an SVR of 7.75%, and some major players charge even higher rates. Frankly, loyal borrowers who stick with the same lender, paying its SVR are being taken for a ride. They should remortgage without delay, if they can do so without paying hefty exit penalties. You can read more about this swindle in The Great British Mortgage Scam. That's it from me. Happy Hallowe'en to all Fools and ghouls! More: Cut The Interest On Your Card | Earn 7% If You're Over 50 | Cut The Cost Of Your Mobile Bill