It would be nice if banks, financial advisors, credit card companies and other financial businesses had your best interests in mind when making policies and advising you, but that may not be the case. Financial institutions make billions of dollars annually as a result of high interest rates, loan products with high fees and restrictive rules that are less than customer-friendly. (Follow these five simple steps to keep your spending under control. Refer to 5 Ways To Control Emotional Spending.)
TUTORIAL: Bond & Debt Basics
Student Loan Debt
Education leads to jobs, right? For generations we've been conditioned to go to college at, literally, all costs. To finance our schooling, we're taking out student loans and not thinking anything of it because we've been told that debt for education, regardless of the cost, is responsible debt.
Student loan debt has surpassed credit card debt as the largest amount of debt in the United States and although that may seem like good news because so many people are attending college, many recent graduates will still be paying their student loan debt when their children head to college. In 2010 the average person left college with a bachelor's degree and $24,000 in student loan debt. This may not seem like much, but when economic times are challenging, especially with a higher than average unemployment rate, it may be many years before that loan proves to be a good return on investment - especially if you choose a low-paying career path.
Not all college debt is a good investment. Evaluate your college spending choices just as you would any other large purchase. Don't go to college without a goal and remember that the less debt you take on, the sooner you can say that you're truly earning money instead of working largely to pay off your school debt. (Extending your principal repayment date can increase your chances of fighting off default. Check out Student Loan Deferment: Live To Pay Another Day.)
Are you a Caucasian woman in her late 30s or early 40s with an annual income of around $50,000? If you are, you have been identified by market researchers as the type of person who is most likely to overdraw their bank account and because of that, banks are very interested in you.
In the past, banks used this as a way to make a large amount of money. If you were to spend more money than you had in your account, your bank would "do you the favor" of advancing the funds to cover your purchase for the average price of $35 per advance. Do the math and that $35 adds up to be a large percentage of what is usually a small amount of money advanced. For those living paycheck to paycheck whose fees are frequent due to such small account balances, these charges can put severe pressure on what is already a financially challenging life.
Times have changed, though. New laws prohibit banks from automatically enrolling you in to their overdraft protection program. You can now take the chance and have your credit or debit card purchase declined at the register instead of paying the overdraft fee. Banks are working hard to get their customers signed up so watch out!
Higher Interest Rate Mortgages
If you're like many, you don't like shopping for a car. You go into the dealership feeling like you will end up paying too much at the hands of a salesperson trying to fetch the highest price.
Many don't realize that up until April 1 of 2011, the person helping you with your home mortgage wasn't any different. By signing you up for a mortgage with a higher interest rate, your mortgage broker could make even more money. This payment, called a yield spread premium, encouraged a broker to attempt to get you in to a higher rate mortgage by offering an incentive.
Although there is a new law banning the yield spread premium payment, it is still in the broker's best interest to have you paying more. Of course, many professionals are looking to find the best terms possible for you, but make sure to thoroughly research all of your options and enter the mortgage process as an informed customer. (Learn how to pay less for your home in the long run, or save in the short run. See Mortgage Points - What's The Point?)
Subprime Credit Cards
For those people who have had some problems with their credit, sometimes the only way to start the rebuilding process is with a subprime credit card. These cards are often low balance, high interest rates cards with a mountain of restrictive terms, high fees and interest rates of sometimes 20% or more. Although this is often the only way to rebuild credit after a bankruptcy or other severe financial event, it is important to pay off the balance on time and not go over the limit. If you do, the fees and higher interest rate will make these cards a trap for those trying to rebuild.
The Bottom Line
Although most financial professionals want to act in your best interests, it's important to remember that nobody cares as much about your financial well-being as you. Before making any big financial decision, do enough research to be able to make an informed choice based on the knowledge you gain on your own.
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