FOOL'S EYE VIEW
Dump Your Financial Dogs In 2006!

By Cliff D'Arcy
December 20, 2005

In the Chinese calendar, each year is assigned one of twelve animals and, according to Chinese custom, people born during that year will share that animal's characteristics. For example, I was born in the Year of the Monkey, and I certainly like to monkey about with my money in order to make it work harder!

Next year is the Chinese Year of the Dog, as was 1994, 1982, 1970 and so on in a twelve-year cycle. People born in these years are said to be honest and faithful to those they love, but worry too much and find fault with others. Also, it's said that they make ideal business people.

Sadly, when it comes to money, being faithful and true is usually a mistake, because financial firms tend to save their best deals (and even their best service) for new customers. Indeed, the evidence suggests that existing customers are there to be milked, for example, by paying higher interest rates on their credit cards, loans and mortgages.

Thus, when it comes to making money and getting the best deals, it pays to be flirty! Therefore, why not make 2006 the year when you ditch your financial dogs and switch them for star products? Here are ten ideas to help get you started:

BANKING AND BORROWING

1. Credit cards

With over 1,300 differently branded credit cards on offer here in the UK, the choice is mind-boggling. However, as I explained in Your Ultimate Guide To Credit Cards, with a little knowledge, it's not difficult to find your perfect plastic.

For instance, why on earth would you pay 16% a year (the average standard interest rate for a credit card) when you could pay under 10% with a Best Buy card? Alternatively, you could become a "0% rate tart", avoiding interest by surfing your debt between interest-free deals lasting up to a year. On the other hand, if you always pay off your bill in full, you can earn hundreds of pounds a year by spending on a Best Buy cashback credit card. The choice is yours!

You'll find a crowd of cracking cards- and a handy search wizard - in our Credit Card centre!

2. Personal loans

January is a bumper month for personal loan providers, as hundreds of thousands of us take out loans to cover the cost of Christmas spending, holidays and so on. However, going to your high-street bank for a personal loan could cost you upwards of £1,000 more in extra interest, as I explained in this article. If you fancy replacing an existing loan with a low-rate substitute, be sure to read my Five Tips To Choose A Loan before you start shopping around.

Check out the lovely loans and easy-to-use search in our Personal Loan centre!

3. Mortgages

Although there are around 8,500 different home loans available in the UK, one thing is for sure: sticking with the same loan or lender for life is always a bad idea. That's because if you're not on a special-rate deal, you're most likely paying your lender's standard variable rate, which is usually its highest interest rate. Rather than paying, say, 6.75% a year, why not get an award-winning no-fee mortgage broker (such as Fool partner London & Country Mortgages) to do all the hard work and find your ideal home loan?

View the happy home loans and leading lenders in our Mortgage centre!

4. Bank accounts

As I warned in Ripped Off While In The Red, millions of bank customers are paying well over the odds when it comes to overdraft fees and interest. What's more, the traditional current accounts offered by the Big Four - Barclays, HSBC, Lloyds TSB and RBS/NatWest - pay pathetic rates of credit interest, typically 0.1% a year before tax. Indeed, switching from an old-fashioned account to one of its modern rivals could see you increasing your credit interest fifty times over, as well as more than halving the cost of borrowing. Result!

Bag a brilliant bank account in our Banking centre!

SAVING AND INVESTING

5. Savings accounts

Savers can choose between more than four thousand different savings accounts in the UK, yet around 99% of these are utter dogs. As a saver, your goal is to earn the highest rates of interest while keeping your money completely safe.

Although most accounts pay annual interest rates lower than the Bank of England's base rate (currently 4.5%), it is possible to earn 5%+ a year on your savings, as I explained here. Alas, my recent search also revealed 37 shocking savings accounts which paid less than 1% a year before tax, as I warned in The UK's Worst Savings Accounts. Avoid these horrors like the proverbial plague!

You'll find ace accounts - and a helpful search engine - in our Savings centre!

6. Child savings accounts and investments

The same advice applies to children's savings accounts: if your child's money isn't in a Best Buy account, then it's not working hard enough. It's possible to earn upwards of 4.5% a year in a good account with local building societies or in the likes of the Halifax Save4it and Nationwide BS Smart accounts. What's more, if you complete a form R85, the taxman won't deduct the usual 20% tax from any interest earned.

With regular-savings accounts, you can earn even higher rates; the Halifax Children's Regular Saver account pays a whopping 10% a year on monthly savings of between £10 and £100. As for cash-based Child Trust Funds, you should aim to earn tax-free interest of at least 5% a year.

Furthermore, beware of investment products that are targeted specifically at children. Many of these plans combine high charges with inferior investment returns, so ignore any financial advertising which includes cartoon characters or kiddies' celebrities, unless you enjoy getting second-rate returns!

Check out the deals in our Investing for Children centre!

7. Investments

Although the stock market had a torrid time in the three-year bear (falling) market of 2000 to 2002, it's had three good years since. Indeed, the total return, including dividends, from the FTSE All-Share Index (which measures the value of around seven hundred of the UK's biggest listed companies) was 21% in 2003, 13% in 2004 and, so far this year, it's up a handsome 20%.

However, there are several hundred funds which have failed to match the stock market's overall performance during this bull (rising) market. For example, independent financial adviser Bestinvest lists 86 dog funds (including many from high-street banks and household names) which have underperformed their respective benchmarks in each of the last three years.

If your fund manager has disappointed you, why not consider switching some of your money into a cheap, simple, flexible investment, such as an index tracker? These passively track a particular stock-market index and, thanks to their low charges, put more of your money to work from day one. You can learn more about low-cost investing in Three Ways To Win With Shares.

Invest in the UK's largest and most popular index tracker with Fool partner Legal & General!

8. ISAs (Individual Savings Accounts)

It's important to understand that an ISA isn't an investment at all - it's merely a tax-free wrapper surrounding an investment, such as cash, bonds, stock-market funds or shares. Sheltering your investments inside an ISA enables you to avoid tax on any savings interest, share dividends or investment income, plus any capital gains you make aren't liable for capital gains tax.

However, do take care when choosing a shares-based ISA, as some providers charge much more than others for providing this service. Rather than paying hundreds of pounds a year in ISA charges, I keep my shares tucked away inside a self-select ISA from leading online broker Squaregain. Although I have several years of ISAs with Squaregain, it only charges me a single annual fee of £25 including VAT. Other low-charging online ISA providers include iDealing.com and Self Trade.

Check out the delightful deals in our ISA centre!

9. Share-dealing

Choosing the wrong stockbroker can mean paying far higher dealing and administrative charges, which will eat into your returns, especially in the long run. Then again, online stockbroking is a fiercely competitive business, which is why many brokers will help you to move your holdings to them by paying any transfer or closure penalties, as I explained in Save A Fortune On Share-dealing.

Pay less when you buy and sell shares; visit our Online Broker centre!

PROTECTION

10. Insurance

Ah, insurance: perhaps the area where the biggest rip-offs lurk! For example, thanks to my Rule of Three, people who buy, say, home, motor or life insurance from a high-street bank or building society often end up paying premiums three times higher than those charged by a Best Buy policy. With travel insurance, my Rule of Three can become the Rule of Ten - yes, some tour operators do charge premiums up to ten times higher than those offered by Best Buys! To prune your premiums, read these articles on paying less for life cover, car insurance, home (buildings and contents), and travel insurance.

Also, I'll throw in a special warning about payment protection insurance (PPI). This covers the monthly repayments on credit and store cards, car and personal loans and mortgages if you are unable to work because of accident, sickness or unemployment. As I warned in Britain's Biggest Rip-off Under Attack, PPI policies are massively overpriced, widely mis-sold, and provide poor levels of cover. My tip - as an insider who worked in this market for eleven years - is to avoid PPI at all cost!

Lower your premiums with quality quotes from our Insurance centre!

Finally, watch out for financial scams, especially when someone contacts you out of the blue, claiming to be able to provide you with great riches or handsome returns. Often, these promises arrive via email or an overseas telephone call. You reply at your peril, as I caution in this article!

More: Find better credit cards, personal loans, mortgages, savings accounts, bank accounts, index trackers, online brokers and insurance today!

Cliff owns shares in HBOS (parent company of the Halifax) and Lloyds TSB.