Wake up to the 0% interest deal exploitation
Inertia is a human habit that financial services companies continually exploit. This is wrong, it should be stopped, but it won't be - thanks to a weak regulator.
Take out a new credit card, for example, and provided you're lucky enough to have an impeccable credit record, you could be eligible to get a 0% interest deal on any new purchases you make with the card.
Even better, you might be able to roll over an existing card debt onto the new one and not pay interest on that balance either.
It all sounds rather compelling but, of course, providers of such 0% card deals never do something for nothing. They know that many people who snap up these offers will be unable to resist the temptation to spend or not clear their debts.
Nor will customers be reminded to do anything when the 0% deal comes to an end - as all such deals do at some stage.
Yes, that horrible human condition called inertia kicks in. The result is that when the short-term 0% offer ends, most customers will suddenly be stung with double-digit interest charges on their balances. So in the end, it is the card issuer that wins out.
Customer inertia is also exploited with vengeance in the savings market. In recent years, we've seen the aggressive arrival of the account bonus on the savings scene. Indeed, few best-buy savings accounts are now bonus-account free.
Why the growth in short-term bonuses? Well, they are a relatively easy (and cheap) way for banks and building societies to get their deposit accounts into best-buy tables - and, as you would expect, any 'best buy' tends to get snapped up by savvy savers.
And, of course, the short-term bonus is a price worth paying for the financial institution if it can then get a significant majority of account holders to stick with it once the bonus expires.
Some bonuses are nothing short of outrageous. I asked new savings website savingschampion.co.uk to dig out details on some of the accounts where the bonus is no more than a bait to get savers in. It came up with some shocking examples.
Take Halifax's Online Saver account.
On the surface, it pays a satisfactory rate of interest of 2.8%. But this includes a 12-month bonus of 2.7%. Strip this out and you are left with an underlying rate of 0.1% – on a savings balance of £50,000, that means a drop in income from £1,400 to just £50.
Sue Hannums, money guru at savingschampion.co.uk, says this is a "shocking case of luring in customers". I think she is being too kind.
Of course, Halifax is not the only one playing the bonus ‘card' – the Post Office, HSBC, Santander and ING Direct are also guilty. They're all quite right when they say savers do not have to stay with them. But surely, a cleaner, more honest way to attract custom is to offer a simple bonus-free savings account.
It's an approach that Kent Reliance has just adopted. Its research shows that fewer than one in five people say they are likely to remember an expiry date for an introductory bonus. Kent Reliance's response has been to offer a range of accounts that provide clear, competitive interest rates with not a bonus in sight.
Of course, bonus-free accounts are not immune from interest-rate cuts - so vigilance, rather than inertia, among savers still has to be the order of the day. But at least any cuts will be gentler and less dramatic.
So, remember, inertia sucks. And if you don't want to suffer the nastiest financial consequences of it, steer way clear of bonus-laden savings accounts.
Jeff Prestridge is personal finance editor of Financial Mail on Sunday. Email him at firstname.lastname@example.org
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.