To catch a mouse you need a mouse trap. The most essential part of the mouse trap is the cheese, which is used to lure the unsuspecting little fellow to his demise. In financial services there are similar traps, which also make use of “cheese” to lure unsuspecting consumers to their financial demise. Some how I feel sorrier for the mice, but that is another topic on its own. This week lets look two financial traps set by the banks and many retailers.
Trap 1: the credit card trap. This is a favourite trap used by all the banks, many retailers and now even airlines. The unsuspecting consumer is enticed into applying for a credit card by the “cheese”, which comes in many different “tasty flavours” a few of which I will list:
- points exchanged for consumer goods
- miles exchange for travel tickets
- cash refunds and discounted purchases
- free benefits e.g. travel insurance
- status appeal (gold, platinum ect)
- free credit for up to 60 days
- monthly prize draws
The death blow is delivered just a quickly and brutally as the mouse trap. Consumers are encouraged to spend using their credit cards as much as possible with only a minimum payment due at month end. Unbeknown to the unsuspecting consumer should he elect to pay only the minimum amount he is charged interest on full amount due at exorbitant interest rates.
Do you remember the days when the winning sportsman received an oversized cheque? I notice this has been replaced by an oversized credit card.
Trap 2: the debt consolidation trap. Many astute consumers avoid the credit card trap only to be caught by trap 2. The “cheese” is usually a combination of private banking facilities and sound advice of consolidating debt at a lower interest rate usually equivalent to the bond rate.
The death blow is skillfully hidden in the repayment structure. The unsuspecting consumer’s loan repayment term is now linked to his bond term. The longer the term of a loan the lower the monthly payment, which is surely an added benefit? Wrong! By extending the repayment term you may be able to afford a little more, but you end up paying much more interest!
In a variation of trap 2 the banks are now offering home-buyers 30 yr bonds vs. the traditional 20 yr bond. This lowers repayments thus making the purchase of a home more affordable, but results in the consumer paying much more interest over the term of the bond.
Are you a Man or a Mouse? I think I would prefer to be a hungry mouse then a greedy consumer; not that it really matters as both will end up getting the chop!
Mcomm, CFP®, HdipTax
T. 021-851 3746