I’ve made my share of bad financial decisions over the years, but nothing feels worse than when a salesperson convinces you to buy something that’s not in your best interest. These kinds of rip-offs usually occur when one party has more or better information than the other.
Think about the first time you bought a car or the first time you went to the bank to sign your mortgage documents. Who controlled the conversation? If you were like me, you probably deferred to the “expert” sitting across the desk and happily signed everything they put in front of you.
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What you might not have known at the time is that some of the extras, such as extended warranty coverage or balance protection insurance, were completely optional and most likely a giant waste of money.
Here are four big rip-offs to avoid:
Mortgage life insurance
If you own your home, chances are you were offered mortgage life insurance from your bank. This type of insurance is not a requirement to qualify for a mortgage, but it’s made to look that way by many lenders who suggest it at a time when you’re vulnerable and haven’t shopped around. You’ll even have to sign a waiver form to decline the coverage.
The reality is that it’s generally not a good idea to buy mortgage life insurance from your bank. It’s the one financial product that goes down in value as you continue to pay – also known as a declining benefit. Term life insurance is much cheaper and offers greater protection.
Extended warranty coverage
It’s almost guaranteed that you’ll be asked to buy an extended warranty the next time you purchase an appliance or any high-end piece of electronics. The reason for the hard sell is that retailers have big profit margins on these contracts. Stores keep 50 percent or more of what you pay for extended warranties or service plans, according to Consumer Reports research.
Consumer Reports recommends against buying extended warranty coverage. One reason is that most repairs may be covered by the manufacturer’s warranty, which should last at least 90 days or longer. Their research suggests that if a product doesn’t break while the manufacturer’s warranty is in effect, it probably won’t during the service-plan period.
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Many credit cards will double the manufacturer’s warranty when you use the card to make the purchase and register the product.
Balance protection insurance
One common telemarketing pitch from banks and credit card lenders is for balance protection insurance.
For a cost of about 99 cents per $100 of the average daily balance (about 1 percent per month) you can protect your credit rating against unexpected job loss or disability.
Customers might agree to add this protection to their credit card thinking that because they pay off the balance in full each month they’ll avoid the fee. Not so. The fee is based on the amount owing on your statement due date, or on your average daily balance, depending on the card issuer.
Not only that, the “protection” is riddled with exclusions, making it difficult to make a claim should you become ill or lose your job.
Balance protection insurance is aggressively marketed to unsuspecting customers and should be avoided like the plague. You’re much better off protecting yourself with a small emergency fund, proper term life insurance and disability insurance.
Door-to-door sales pitches
It may be tempting to sign up for a home security system, or switch to a new energy supplier to save a few bucks. But always be cautious about door-to-door sales pitches. They may use deceptive pitches or questionable tactics and sell substandard, but expensive products or service contracts.
A reputable business shouldn’t require your signature at the door. Take your time and read the documentation at your leisure. If the sales pitch has a limited time offer attached to it, ask the salesperson to leave immediately and close your door.
Shop around for competitive quotes from businesses offering similar services. Contact the Better Business Bureau to investigate the company or to get a list of businesses offering similar service.
Before you sign any contract, take the time to read the fine print. Don’t get pressured into signing a contract on the spot.
I’ve fallen for the extended warranty pitch a few times before and I’m guilty of signing up for mortgage life insurance on my first mortgage term. These days I’m a lot more cautious and borderline skeptical of any sales pitch that comes my way. I can spot a rip-off or a scam a mile away.
What other rip-offs should you watch out for?