FOOL'S EYE VIEW
Why It Pays To Shop Around

By Jane Mack (TMFJane)
October 30, 2002

As I wrote in an article yesterday, a report published by the Financial Services Authority points out that consumers are losing as much as £700 a year by not shopping around.

One of the reasons is that people tend to think that the market is so competitive these days that there is little difference between what's on offer. I find this quite strange because MORI carried out some research for the Department of Trade and Industry last year and found that while people are extremely anxious to get the best price for cars and white goods, they weren't as conscientious when it came to savings and investments. And yet these are 'products' in just the same way as a washing machine is. Why do we think the financial industry is competitive but not the white goods industry?

Another reason we don't shop around, of course, is the ubiquitous inertia. Although it's much easier these days to compare prices using the Internet, others think that they'll have to spend half the afternoon on the phone or seeing a financial advisor and that's just too much effort for some.

It also doesn't help that companies still throw too much financial jargon at us – especially when it's in very tiny writing and packed onto two or three pages of Terms and Conditions. And, as the report points out, to some extent there can be almost too much to choose from. For example there are more than 4,000 different mortgages on offer and not even the most diligent consumer is going to compare each and every one of them to see which one suits.

Unfortunately it means a lot of people lose out and we need to realise this. Although the individual savings that can be made don't amount to huge sums of money, taken together and annualised over the long term, the losses can be very large indeed. For example, average losses look like this:

                        £ per year
Current account             26
Savings account            117
Mortgage                   230
Credit Card                137
Personal loan              116

That amounts to a loss of £626 a year although a typical couple under the age of 34 with no children is likely to be losing £711 a year since they are more likely to have a personal loan and carry credit card debt than, say, a retired single person. The financial loss is greater the more products you have.

Much as it may take some effort it's clearly worth shopping around so the first question to ask yourself is what interest rate you are paying on your mortgage, personal loans and credit cards. If you don't know, then ring up the lender and find out. If it's too high then take action:

Mortgages: If you're paying more than, say, 6.5% on your mortgage you're bonkers. There are plenty of lenders around charging at least 1% less than that and there are even some discounted rates for under 4%. Even if you've got redemption penalties to pay it may still be worth your while to switch.

Personal loans: There are several good deals around at the moment with rates under 10%. If you're paying more than that then work out whether you'll save money by switching particularly if you cancel any payment protection plan. These are usually front-end loaded so you could lose out – it depends how far into paying off the loan you are.

Credit Cards: If you carry a balance and you've got a credit card with one of the main High Street banks, you could be paying around 17% in interest. This very morning Egg announced a new credit card deal offering 0% on new purchases and balances transfers, fixed until May 2003. The fee-free card also pays 0.5% cash back on all purchases! There are other good deals around too so consider transferring your credit card balance to a cheaper rate. And pay it off!

Finally, it's interesting to note the results of the FSA's research into losses from equity ISAs. While those in high income and socio-economic groups generally tend to do more shopping around they tend to lose more in absolute terms simply because they have more money. With equity ISAs high earners also seem to lose more in yield than low earners. As the report states:

One possible explanation could be that higher earners are more likely to believe in – or to be persuaded of – the ability of certain fund managers to outperform the market and are willing to pay the higher charges of such managers. Perhaps lower earners are more likely to opt for the cheap and cheerful approach adopted by tracker funds.

So those of you who are investing in managed funds might want to consider re-thinking that strategy.

>> The Fool's Guide To Mortgages, Personal Loans and Credit Cards