Close encounters of a costly kind with financial services

Finance can be expensive, with poor value products upping cost to customers, writes Laura Slattery

From the day we apprehensively approach our nearest bank's customer service desk in our school uniform and open our first account, we enter the merry-go-round of financial services.

There follows a series of close encounters with the intricate and myriad ways financial institutions have of parting us from our money in perfectly legal but no less galling ways.

Often, they do this by burying crucial information in small print and adding a mystifying layer of jargon. Some products are just bad value and the bank or insurance company makes little attempt to hide the fact, relying purely on consumer fears and desires to keep sales ticking over.

Poor value is evident in countless products and services, but here are seven common ways financial services firms catch consumers out.

1. Credit card interest charges

Fans of plastic often don't realise that credit card providers generally have a nasty habit of charging interest on the full balance they owe for a specific period even if they have paid off some of it or even the majority by the due date.

If cardholders don't repay the full balance by the due date, they "forfeit" the interest-free period of up to 56 or 58 days and interest is charged on the full balance.

So they may make a monthly payment of €800, but if their balance was €1,000, they will still end up paying interest on that amount, despite the fact that they have a mere €200 outstanding.

Eventually, cardholders end up paying interest on the interest charges themselves and easily get caught in a spiral of debt - all of which is good news for the card providers, who rake in the profits.

2. Serious illness policies

Some insurance companies call these products "specified illness" insurance, and well they might.

The policies give a tax-free lump sum on diagnosis of specified conditions, with the insurer usually paying up after a 14-day "survival period". Policyholders might well be struck down with what in medical terms is a very serious illness, one that keeps them hospitalised and prevents them from working, but if it's not listed on the policy document, their claim will be rejected.

For example, most insurers will only pay up if the policyholder loses two limbs in an accident - one is not enough. Some even specify that the loss must be above a certain joint. Policyholders with "non-invasive" cancers will also see their claims rejected.

Many of those who are turned down will understandably feel that they have been paying premiums for nothing.

3. Mortgage discount offers

"Special" one-year discounts used to be there for the taking. But now some financial institutions are using them to lure borrowers away from much better products called tracker mortgages.

Tracker mortgages are so-called because the interest rate is linked to the European Central Bank's base rate and moves up and down at a set margin above this rate. This gives borrowers a degree of comfort that their lender won't hike up the interest rate just because they feel like it.

Crucially, the tracker rates are also lower than standard variable ones.

But some lenders only offer tracker loans to "new" customers. What they then do is advise first-time buyers to take one-year discount rates. After the year is up, the borrowers are classified as "existing" customers and denied the best rates. The price of accepting the offer is a higher interest bill over the full term.

4. Zero per cent finance offers

Free credit! Yes, but consumers need to be very careful with 0 per cent finance offers, which are typically blazoned across high-value furniture and electronic goods in order to suck in the "buy now, pay later" shopper.

A six-month or 12-month interest-free credit deal can be a great way to spread the cost of luxury household purchases, but woe betide any eager consumer who doesn't stick to the rules.

Fail to pay off the full balance within the specified time period and that 0 per cent interest rate will rocket to 20-30 per cent on the full value for the entire period since the purchase.

Some 0 per cent deals are deliberately structured to catch people out, requiring a series of low monthly payments then one big balloon payment, thereby increasing the chances that consumers with even minor cashflow difficulties will break the terms of the deal and be charged whopping interest rates.

5. Payment protection

Payment protection insurance is sold in conjunction with personal loans, credit cards and mortgages and is a highly profitable product for the banks.

This expensive insurance covers loan repayments for up to 12 months in the event the borrower suffers from a specified illness or is made redundant.

Nothing wrong with that, you might think: it's worth paying up if it means avoiding unimaginable horrors like court judgments for failure to pay debts, or repossession of the family home.

But too often consumers are not informed that this insurance is optional. And even if they are, the lenders aren't going to mention that the rate of successful claims is as low as 1 per cent of all policies sold and, if they really want protection, they would be better off taking out an income protection policy sold by rival firms.

6. Mobile phone cover

The policies sold with mobile handsets are another example of how insurance companies will use all kinds of restrictive exclusions to load the odds in their favour.

Some policies will not pay up for a replacement phone if the handset is lost, stolen or damaged after the phone has been left behind in any place to which the public has access or on any form of public transport - the most fertile grounds for claims. Dare to make more than one claim and the insurer will automatically deem the loss or theft a suspicious one, questioning whether the person is taking sufficient care of their phone.

There are also high excesses - the first part of any claim the policyholder must pay themselves - on mobile phone cover, starting at just over €30 for the first claim and leaping to €66 for second and subsequent claims.

7. Home reversion schemes

Elderly homeowners who are asset-rich but cash-poor may be attracted to the idea of home reversion schemes, where a company pays them a lump sum for a share of their property while guaranteeing them a lifelong right of residence.

One company selling home reversion plans advises elderly homeowners to consider how much cash they might need for things like nursing home care, buying a holiday home, or helping out a family member with a lump sum.

The catch is, as they "free up" the homeowners' equity, the companies take a substantial cut, paying far less than market value for their share of the property. As a result, both financial advisers and solicitors believe the schemes should be viewed as something of a last resort.