FOOL'S EYE VIEW
Ridiculous Rip-offs Revealed!

By Cliff D'Arcy
February 28, 2006

Back in the Eighties, I started my first full-time office job, working in the accounts department of a leading retailer of outdoor goods.

I learned two important lessons from my first clerical position: first, that if the figures don't add up, then something is definitely wrong. Later, the company accountant was sacked for fraud, which explains why I could never balance the books! The second lesson I learned was just how large retail mark-ups were. My employer was importing goods for, say, £25 that sold on the high street for £125 -- I was amazed to discover that the firm's profit margin was quite so high!

To cut a long story short, I left this job to join a major insurance company and went on to spend the rest of my career in financial services, working for a string of insurers and banks. Here are ten rip-offs that I discovered along the way:

1. Standard interest rates on credit cards

Since the start of 1996, the Bank of England's base rate has been as high as 7% and as low as 3.5% a year. However, over the past decade, standard interest rates on credit cards have remained stubbornly high, regardless of what has happened to the base rate.

Although the base rate is just 4.5% at present -- low by historical standards -- credit-card interest rates have been creeping up. For example, since the start of this year, John Lewis, Tesco Personal Finance and Halifax One cards have all increased their interest rates on purchases. Overall, the average interest rate on purchases made on a credit card is just over 15½% APR, or about eleven percentage points over the base rate. What an easy way to make money!

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2. Payment protection insurance (PPI) for credit cards

Credit card repayment protection, or CCRP, is optional insurance which covers the monthly repayments on your credit card if you are unable to work due to accident, sickness or unemployment, plus it pays off your debt if you die. Although this sounds like valuable protection, in reality, it's utter tripe!

First, PPI policies are riddled with small print, exclusions and get-out clauses, so making a successful claim is hard work. Second, these policies are five to ten times as expensive as they could be, as I revealed in Millions Conned By Card Cover. Having worked in the PPI industry for eleven years, I know just how profitable these policies are, which is why I've never bought one!

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3. High-street personal loans

Let's say that you want a holiday, new kitchen, bathroom or car and decide to borrow £5,000 over three years. With a table-topping Best Buy personal loan without payment protection insurance from Fool partner Moneyback Bank, you'd pay back a total of £5,427.36 over 36 months (5.5% typical APR).

However, if you made the mistake of going into your local bank branch for a loan, you'd pay a great deal more interest. For example, the same loan from HSBC would cost £6,072.48 (13.9% typical APR), or over £645 more. So, if you don't want to be eaten alive by loan sharks, read these tips and check out the terrific deals in the Fool's Personal Loan centre!

4. Payment protection insurance for personal loans

Note that the above loan quotes were for unprotected loans -- loans without personal loan protection (PLP). Payment protection insurance for loans is an even bigger rip-off than that sold to cardholders, thanks to sky-high premium rates and the fact that the entire premium is added to your loan as a lump sum, with interest charged on top.

As a former manager in this industry, I know that lenders are making over £3 billion a year from selling this rip-off loan protection. Hence, as I revealed in Beware Over-Priced Loan Protection, I've never bought one of these polices, and probably never will. Instead, I'd "self-insure" by setting aside the premiums in a high-interest savings account, creating my own pot to draw on if misfortune strikes.

5. Extended warranties

As we revealed in this article, these policies (and non-insured "service contracts") offer laughingly awful value for money and are best avoided at all costs.

Take, for example, this radio, on sale at Comet for £18.99. A three-year warranty costs £34.99, or almost twice as much as the radio itself! When asked if he'd like this bargain cover, one sharp-witted Fool replied, "No thanks, not when an extra £2.99 would buy two more radios to keep as spares!" Incidentally, a five-year policy costs even more: £44.99, or 237% of the radio's price tag. You couldn't make it up!

Many thanks to Foolish reader DrFfybes for spotting this absurd policy!

6. Interest rates on savings accounts

As I explained in Your Ultimate Guide To Saving, there are over four thousand different savings accounts on offer in the UK. Alas, these can be divided into the handful of Best Buy accounts which pay, say, more than 5% a year before tax, and the remainder, which I dub the "Don't Buys!"

For example, which would you prefer: earning 5.15% AER with the table-topping ICICI HiSAVE account, or a pathetic 0.1% a year in a Lloyds TSB Reward Savings account? This is just one of dozens of accounts which pay 0.5% a year or less on £1,000 -- what right royal rip-offs!

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7. Bank accounts

If you don't have one of the new generation of bank accounts, then your current account is a dog, not a star! Although fierce competition for banking customers has led to the introduction of some brilliant bank accounts, up to eight in ten adults continue to stick with their old-fashioned bank account.

Alas, these ancient accounts typically pay credit interest of 0.1% a year (£1 a year before tax on £1,000), while charging overdraft interest rates of up to 30% a year. So, by ditching and switching your bank account, you could earn fifty times as much interest and avoid charges for going into the red for an entire year. Wow!

Check out the Best Buys in our Banking centre!

8. Standard variable rate mortgages (SVRs)

If you're not paying a fixed, discounted or other special-rate deal on your home loan, then you're likely to be paying your mortgage lender's bog-standard rate, known as the SVR. As I explained in The UK's Cheapest Mortgages, most big banks charge SVRs well in excess of the base rate. Indeed, the general rule is: the bigger the bank, the higher its standard variable rate!

Choosing (or switching to) a better mortgage isn't easy, thanks to a vast array of charges, fees and so on. Hence, my advice would be to employ the services of a top no-fee mortgage broker, such as the award-winning London & Country Mortgages.

Check out the delightful deals in our Mortgage centre!

9. Mortgage payment protection insurance (MPPI)

As I've already explained, PPI sold alongside credit cards and personal loans is a con, so it comes as no surprise that mortgage PPI is yet another awful product. It, too, is vastly overpriced, because it's sold to a captive audience by advisers working for mortgage lenders, so there's little industry competition.

As I warned in The £10 Billion Mortgage Protection Racket, an expensive policy (such as that sold by Lloyds TSB/C&G) costs almost five times as much as that sold by the small-but-beautiful Market Harborough BS! My advice would be to scout around for cheaper stand-alone MPPI, such as those policies marketed by British Insurance, Burgesses, Helpupay and Paymentcare.

10. Replica football shirts

Many of us can't wait for the FIFA World Cup to arrive (only around 100 days to go!). However, think twice before rushing out to buy the must-have England away shirt, which was launched this week, because you might end up paying an arm and a leg for it!

Last year, the Office of Fair Trading fined ten firms following a probe into price-fixing of replica football shirts, so you need to tread carefully. For example, the recommended retail price of this shirt is £44.99, but you can find it for £25 by shopping around, releasing £20 to buy beer and pizza for the big games!

More: Find better 0% credit cards, personal loans, savings accounts, insurance, bank accounts and mortgages!