Financial Trick or Treat?
October 30, 2013Along with the cooling temperatures and falling leaves that mark this time of year, comes the annual parade of children dressed as ghouls and goblins, marching door-to-door asking that most provocative question: trick or treat? It may seem silly when the question comes from a little boy and girl dressed up for Halloween, but when it comes to your money, how many times do you think you are getting a treat, when in reality you might be falling for a trick? The following are examples of financial tricks that are disguised as treats:
1) No payments or interest for 12 months!
We’ve all seen them. Advertisements for furniture, electronics, or appliances offering “free financing” if you buy today, but just how “free” is it? Many merchants simply jack up the price of their merchandise to compensate for the interest they’re not getting for financing the purchase, while others “trick” you into believing that no interest will be charged when in actuality they begin charging interest from the moment of purchase. As long as you make all payments on time and pay off the FULL balance by the end of the “free” period, they waive the finance charge, but miss a payment or carry a balance beyond the free period and suddenly that finance charge—12 month’s worth—shows up on your account…so much for “free” financing. The Attorney General’s office of Maryland offers these tips when it comes to “free financing.”
2) 0% financing on balance transfers
Similarly to #1, many well-minded borrowers see the opportunity to consolidate high-interest debt onto one card as a “treat,” but there are several pitfalls that could make this a “trick” in the end. For example, many balance transfer offers charge a fee for the transfer, so the rate might be 0%, but there is still a cost associated with it. That said, paying a 3% transfer fee instead of an 18% APR may still be a good value.
However, another example of how this can trip up borrowers is keeping old lines of credit open and using them, which defeats the purpose of the balance transfer. It may not be necessary to close these old lines, but be sure not to use them to avoid adding to your debt load. Lastly, balance transfer offers, like the 12 months no payments or interest offers, may charge a default rate that is much higher than your previous rate if you miss a payment, so be sure to read the fine print, and use balance transfer offers wisely.
3) Purchases on layaway plans
Many large retailers, including Sears, Kmart, and most recently Walmart, have layaway payment plans that allow consumers to purchase items little by little over time rather than paying for them all at once. This can seem like a “treat” for consumers that are looking for an alternative to buying on credit and paying interest, and when you consider that not being able to pay off the item on time results in a refund of your money (less a small fee), it seems like there is little downside, but like a Transformer, there’s more than meets the eye.
For starters, layaway plans allows someone to purchase an item they cannot afford to purchase. That just sounds bad. It might be because they are under pressure to buy gifts for the holidays, or maybe they are expecting to come into some money soon (e.g. a tax refund or overtime pay), but consumers should never feel pressured or tempted to buy things they cannot legitimately afford to purchase yet. Instead, they should save up and buy the item when they have the money to do so. Not only will this keep them from overspending, but by the time they do have the money to purchase the item, it may be at a discount.
4) Apply for credit today and receive bonus miles, 15% off your purchase, etc.
My colleagues and I travel for a living, and on almost every flight we take we receive a “special” offer that goes something like this: If we open a credit card through that airline we will receive 25,000 bonus miles, enough for a free ticket to anywhere that airline flies in the U.S. When you consider the cost of airfare, that sounds like a great treat, and if you’re going to use a credit card anyway, what’s wrong with getting miles for every purchase? Most of the airlines I fly waive the annual fee for the first year, but as soon as that second year kicks in, so does the annual fee—some as high as $95 a year. Not all travel rewards cards charge a fee, so if you are able to use a credit card responsibly, and you prefer to use your rewards for travel, then one of those may be a better option.
5) Try it for free!
Have you ever watched an infomercial or seen an advertisement that offers a “free” trial period? It seems simple enough. You try out the services for a limited time to see if you like it, and if you do, you are already subscribed, and if you don’t, you simply unsubscribe. What could be tricky about that? Well, as one of my colleagues found out, plenty.
Her husband subscribed to Ancestry.com to learn more about his family history. He provided his information, but before he could get his results, he was required to provide a credit card number. Since Ancestry.com offers a 14-day free trial, he didn’t think much of it—and that’s where lies the trick. Like many people, her husband decided he was not satisfied with the service, but failed to cancel his subscription. Two months and $40 later, his wife (my colleague) noticed the charges on their credit card and promptly canceled the subscription.
I recently purchased a ZQuiet anti-snoring device (uh, for my wife, of course). I too had to provide a credit card number in order to receive the device, but if I was not completely satisfied, I could return it within 30 days and not be charged. Well, after several weeks of uncomfortable sleep, I have decided that I am going to return the product. I fully expect not to be charged (except for a nominal “trial” fee), but if I don’t follow the return instructions exactly as they are provided, I may get charged for the product anyway.
You see, many products are sold with “free” trials or “money-back guarantees” knowing that consumers suffer from financial inertia. If you are going to take advantage of such an offer, be sure you know exactly what you are getting into. If you end up liking the service, the free trial may have been a “treat,” but if you don’t and fail to cancel, then the “trick” is on you.
Well, these are just a few of the “tricks” that are placed in our financial pillowcases as “treats.” Be sure to look through the financial candy before you consume it. Otherwise, you might wake up in the morning with a tummy ache.