Five weapons of money destruction

Avoid these five financial traps at all cost, or you'll end up losing a fortune!

Way back in mid-2003, in the aftermath of the Iraq war, I coined the phrase "Weapons of Money Destruction" (WMDs) to describe poor-value financial products. These particular WMDs can also be very dangerous when they lay waste to your wealth.

Nearly seven years later, there are still dozens of financial products and services which fall into my WMD category. These five immediately spring to mind:

1.    Ordinary credit cards

Although the Bank of England base rate is at a 316-year low of 0.5% a year, it seems that word has yet to reach the UK's credit card issuers. Indeed, over the past year, the interest rates charged by credit cards have actually risen. For the record, a typical credit card now charges interest of over 18% a year -- 36 times the base rate -- on purchases.

Of course, if you play your cards right, then you don't need to pay these sky-high rates at all. For the best results, try a 0% balance transfer card or a 0% on new purchases card.

2.    Convenience cash machines

I live at the top of a long, steep hill close to a university campus where there is no bank ATM (cash machine) nearby. As a result, many students and locals use the convenience cash machine in the campus shop or in the pub across the road.

These machines charge a withdrawal fee of £1.85 per cash withdrawal, regardless of size. Last week, I saw one student take out two £20 notes in two separate transactions, paying two lots of £1.85. In other words, he paid £3.70 (9.3%) to take out £40, when he could have paid just £1.85 (4.6%). Oops.

My advice is to use these convenience ATMs sparingly and, ideally, only in emergencies. If you do use them, take out all that you need in one go, rather than paying multiple charges for multiple withdrawals.

3.    Outdated savings accounts

One of the best tricks of banks and building societies is what I call the 'bait and switch' trap. This is done by launching a new savings account with plenty of advertising and fanfare. Once the savings target has been reached, the account is quietly withdrawn and the sneaky rate cuts can begin.

This trick means that savings providers may have, say, ten different accounts being actively promoted, but a further 90 'dormant' accounts lurking behind the scenes. These dormant accounts often end up at the bottom of the heap and light years away from the Best Buy tables.

So, if you have a savings account which you haven't looked at for, say, six months or more, then dust it off and check out the interest rate being paid. If it's not up to scratch (for instance, if it pays less than 3% a year before tax), then it's high time you ditched and switched.

4.    Extended warranties

Almost five years ago, in May 2005, the rules covering the sale of extended warranties for household appliances and electrical goods were tightened up.

In theory, this regulatory clampdown was supposed to improve customer choice and value. In reality, retailers and warranty firms found little had changed, leaving them free to charge eye-watering sums for extended warranties.

What amuses me most is when a salesperson spends ten minutes telling you just how reliable this particular £400 digicam is. Then s/he spends the next ten minutes urging you to buy a £200 extended warranty just in case the self-same digicam goes kaput.

My advice is to shop around just as hard for a warranty as you would for the product which it protects. Otherwise, you could easily pay £200 for cover costing just £30 from a Best Buy provider. For example, Warranty Direct will cover three large household appliances like washing machines and dishwashers for less than £8 a month - and if you use exclusive lovemoney.com voucher code RAOX108, you'll get a further 10% off the price of a policy.

5.    Standard variable rate (SVR) mortgages

The standard variable rate, or SVR, is the mortgage rate charged to homeowners who aren't paying a special or reduced rate on their home loan. Almost all mortgage lenders have an SVR, but some are a lot higher than others.

The problem with an SVR is that it is the 'bog standard' rate paid by existing borrowers, which can mean that it is a lender's highest interest rate. What's more, although the base rate hasn't budged since March 2009, SVRs have recently been creeping up. Most of these rate hikes have been between 0.25% to 0.65%, but the Skipton BS recently whacked up its SVR by a whopping 1.45% to 4.95%.

So, why put up with 'bog standard' when you can get 'gold standard'? If you're not impressed by your lender's SVR, then demand a better deal. If it won't play ball, then get online to find a low-cost remortgage offer. Don't let new customers grab all the best deals!

Try lovemoney.com's super-cool online mortgage tool to find a happier home loan!

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This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

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