For consumers, a little homework goes a long way. Here are eight would-be deals to steer clear of, as well as our suggestions for better options.
1. Unlimited Long Distance
Many telephone plans bundle “free” unlimited long-distance service with local calling service. If you don’t make a lot of long-distance calls — or if you make a lot of them from your cell phone — these plans may not be cost effective. A bundled plan typically costs about $20 more than a local plan, but the average American consumer makes fewer than two hours of long-distance phone calls a month, according to the Federal Communications Commission. That’s about 17 cents per minute.
Better Deal: Skip the extra fees, and buy your long-distance service from a reseller such as ECG or Pioneer Telephone. These companies buy their long-distance service wholesale from the larger telecommunications firms but offer the same general quality for far lower prices, billing by the minute or fraction thereof. (ECG charges 2.5 cents a minute for interstate phone calls; Pioneer’s price is 2.7 cents.)
Alternately, sign up for a voice over Internet protocol (VoIP) plan from a carrier like Vonage, whose plans start at $25 a month for both local and long distance. Calls travel over the Internet, though, so you need a stable, active cable or DSL Internet connection for this to work.
2. Frequent-Flier Rewards Cards
Credit card rewards tied to airline miles or gift points were the earliest players in the sector, but it’s time to dump them. For one thing, the benefits have shrunk, particularly on airlines: They’ve increased the number of miles needed for a free flight; reduced flight schedules, making free seats harder to find; and, in some cases, imposed a booking fee on rewards flights.
On certain rewards cards, annual fees may also outweigh the benefits. The perks-laden American Express Platinum, which costs $450 a year, offers a complimentary airline ticket for every first- or business-class fare purchased, plus a concierge service, free access to airport lounges, and other bonuses. It all sounds great, especially if you are booking lots of business-class travel. But if not, you just paid $450 to have someone else make your restaurant reservations.
Better Deal: Try cash-reward cards instead. Airline miles and gifts are fine, but if you have the cash in your wallet, you can make your own purchasing decisions. Peter Flur of Credit Card Goodies, a 10-year-old Web site that monitors rewards cards, recommends Blue Cash from American Express, which offers up to 5 percent cash back on purchases at gas, groceries, and drugstores, as well as 1.25 percent on all other purchases once a cardholder rings up $6,500 in purchases any given year.
3. Checking Accounts That Pay Interest
Interest-bearing checking accounts at traditional brick-and-mortar banks often pay only 0.24 percent interest but require high minimums to avoid a monthly maintenance fee. On, for instance, a deposit of $3,400 — the average minimum, according to Bankrate.com data — that amounts to just $8.16 in annual interest.
Better Deal: If you need to keep that money liquid, get a free checking account — sans interest — with a low minimum balance, suggests Mike Moebs, an economic researcher whose firm surveys bank fees and rates. Then take the extra money you would have had to keep in the interest-bearing account and put it in either a higher-paying savings account or a money-market fund; the latter are now paying about 1.3 percent interest, on average.
Richard Barrington, an analyst with MoneyRates.com, also suggests savings accounts from online banks, which often offer better yields because they have much lower overhead. But make sure these banks are FDIC-insured. Among the accounts ranked by MoneyRates as of July 31, Choice Financial offered one of the highest, with a yield of 2.26 percent without a minimum balance; 1st Constitution Direct has accounts that offer a higher yield (2.5 percent), but only with a $10,000 deposit.
4. Overdraft Protection
Many banks offer it automatically when you open an account, and it may sound like a valuable safeguard. If you bounce a check or try to withdraw more cash from the ATM than you have in your account, you won’t suffer any embarrassment when the bank refuses to process a transaction.
But consumer advocates say overdraft protection is just a way for banks to earn money at your expense. The reason: high overdraft fees, which average $27 per event (although many large banks, including Bank of America, charge as much as $35). That’s a substantial penalty, considering the typical transaction prompting the overdraft fee is $20.
Better Deal: Find a bank that will let you opt out of overdraft protection, or set up a linked savings account to back up your checking account in case of an overdraft. In the latter case, there may still be a fee to transfer funds between accounts, but it’s typically lower — at B of A, for instance, it’s only $10.
5. Extended-Warranty Protection
Don’t buy additional warranty coverage for electronics and major appliances. For one thing, some repairs are already covered by the standard manufacturer warranty. And Consumer Reports’ researchers have found that products seldom break within the extended-warranty window — and that when electronics and appliances do break, average repair costs are about as much as an extended warranty.
Better Deal: Check the fine print on your existing Visa, MasterCard or American Express. Many of these cards, particularly if they are platinum or gold, will extend the warranty for a year. “It’s one of the greatest freebies from credit card companies ever,” says Edgar Dworsky, a consumer lawyer and founder of the Consumer World Web site. The warranty protection varies, so review the policies on your existing cards before you make a purchase — then use the one offering the best warranty protection.
6. Going-Out-of-Business Sales
They don’t offer the bargains you’d expect — at least at the outset, when the promoted discounts are usually off the full retail price. That “30 percent off” sale may not be any better than the deals you could get before the liquidation process started. In some cases, you may actually be better off buying from a rival store that is trying to compete with the bankrupt retailer — and will be around to take care of any problems after the liquidating store is out of business.
Better Deal: Shopping robots, such as PriceGrabber.com and Shopping.com, are good places to comparison shop and may be particularly useful before visiting any liquidation sale, says Dworsky. One of his favorite sites, PriceSpider.com, posts historical prices; the range of prices should help you determine whether the price is likely to hold or continue to drop.
7. Paying for a Credit Report
Despite its name, FreeCreditReport.com is not gratis. Here’s what the fine print really says: Order your free report and you get a seven-day free trial membership in a credit-monitoring service. If you don’t cancel within seven days, you’ll be billed $14.95 a month until you bail out. Be wary of other sites making similar come-ons.
Better Deal: Visit AnnualCreditReport.com instead — the government-approved Web site where you can get a free credit report from each of the three major credit bureaus once a year. It won’t give you your actual credit score, but most people don’t need it. (The exception: If you’re actively shopping for a loan right now, go to myFICO.com to get your current score — and a report from Equifax or TransUnion — for $16.)
If you’re merely curious about how lenders perceive your credit record, you can get a good estimate of your credit score for free at CreditKarma.com. You can also try the credit-score compass at Credit.com; you will probably need your actual credit report to answer some of the site’s key questions, such as the age of your oldest credit account and the number of outstanding loans and credit cards.
8. Fraud Alerts
Don’t pay for identity-theft-protection services that automatically put fraud alerts on your credit report. “You can do that yourself — it’s so easy,” says Eileen Harrington, deputy director of the of the Federal Trade Commission’s Bureau of Consumer Protection. It’s free, too.
Still, she urges caution: “You don’t want to put a fraud alert on your credit report as a general matter, because that means you can’t easily open new accounts.” You should use fraud alerts only if you’ve had your wallet stolen or something else has happened to put you at real risk, she says.
Better Deal: Review your monthly credit card and bank statements regularly to make sure there are no unauthorized charges. Also, don’t forget to obtain a copy of your free credit report annually from each of the three major credit bureaus — using AnnualCreditReport.com, of course.
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