Even the savviest spender can occasionally get caught in a web of wasteful money traps. People’s Choice Credit Union spokesperson, Stuart Symons, warns of five common spending traps that can sabotage your financial plans, and gives his tips on how to avoid them.
1. Subscription traps
“It’s all too easy to sign up for a free trial or a limited-time deal, only to find out a couple of months later that you’ve actually subscribed for that retailer’s ongoing service – and the privilege of paying for it indefinitely,” Mr Symons said.
“Things like content subscriptions for online news sites, membership for gyms, entertainment subscriptions for music, movies, television or gaming, and automatic software updates are repeat offenders for poor disclosure of ongoing costs following free trials or special introductory deals,” he said.
“Unfortunately some businesses know that many of us don’t read the fine print and they often make little or no attempt to remind us when the honeymoon is over. To avoid getting caught in a subscription trap, read the fine print, watch out for pre-checked boxes online and be sure that the price on the invoice matches the total at the checkout.”
“If there’s a free trial on offer, set a reminder to cancel the subscription before the trial period expires if you want to try, not buy.”
2. Drip pricing
“Airlines, ticketing, accommodation and vehicle rental companies are notorious for eye-catching headline rates that attract customers, only to have additional charges incrementally disclosed or ‘dripped’ in during the purchase process,” Mr Symons said.
“From booking fees to carbon offsets, customers end up paying more than initially expected, thanks to undisclosed – and often unavoidable – extras added to their purchase,” he said.
“Under Australian Consumer Law, you are entitled to see the total price of a purchase, inclusive of any additional fees, charges or taxes. The Australian Competition and Consumer Commission has recently cracked down on a couple of airlines for this dubious practice, but consumers must remain vigilant.”
“Look out for pre-selections, thoroughly check your purchase before you make any final payments, and be prepared to back out of the transaction or shop around if you start to encounter additional charges you don’t want to pay.”
3. ‘Freemium’ pricing
“’Freemium’ is a business model and pricing strategy commonly seen in the sale of apps, software or games which are free of charge or cheap at the outset, but which charge for proprietary features, ad blocking, functionality, or virtual goods after purchase,” Mr Symons said.
“Similar to drip pricing, this strategy is often used on ‘lite’ products with less features to promote a full version, and sometimes the temptation to ‘play on’ can lead to unforeseen and unbudgeted expenditure,” he said.
“The Freemium pricing model can be dangerous to parents’ wallets too, because it can take advantage of the purchasing power of children. With password or fingerprint ID purchasing authority, youngsters can rack up charges from 99 cents to $99 without even knowing it, or understanding the consequences.”
“So be aware of the strings attached when prompted with a notification to unlock content or purchase virtual goods, and restrict in-app purchasing on your devices.”
“Rent-to-own plans offer instant access to items you may not otherwise be able to immediately afford,” Mr Symons said.
“There are also new payment methods on offer which will let you buy and have what you want now and then make scheduled repayments to cover the cost of your purchase, rather than paying the total upfront – like layby, but with the immediate receipts of the goods,” he said.
“If you are going to rent-to-own or pay with services like Afterpay, read the contracts and terms and conditions carefully. Late and overdue fees and interest charges may result in you spending more than the cost of the original purchase.”
“To avoid this trap, plan your purchases ahead and save the money necessary to buy what you want or need outright. By planning what you buy, you can also shop around and time your purchase with sales and get the best price, saving you even more.”
5. Payday loans
“With payday a week away and bills to pay now, these ‘quick little loans’ can seem like a real lifesaver. But there’s growing concern among consumer groups that these payday loans can trap those who can least afford it in a dangerous cycle of repayment,” Mr Symons said.
“What is often not advertised is that the amount borrowed, plus the interest and fees accrued, have to be repaid in a very short period of time – often only a few weeks – and the money owed is automatically debited from the customer’s bank account or pay,” he said.
“These large and often unrealistic repayments can easily leave customers needing another loan to get through, and another, and another. They’re also losing hundreds of dollars in fees and interest in the process, while never improving their long-term financial outlook.”
“Payday loans can charge the equivalent of more than 240% interest per annum. By comparison, interest on credit cards and personal loans is typically between 5% and 20%. It’s also important to note that, subject to approval, $1,000 borrowed on a credit card could be repaid in smaller increments over a longer period of time, making these lending methods more affordable, and can eliminate the repayment trap.”
“If you need to get your finances back on track, be sure to talk to your bank or credit union before signing up for a payday loan. You can also speak with your electricity, gas, phone or water provider about a payment plan, or talk to a free financial counsellor on 1800 007 007 for advice on financial hardship.”