When it comes to building wealth, avoiding the wrong financial products can be just as important as choosing the right ones. Many financial products appear to be convenient or essential, but often come with hidden costs, high interest rates or poor long-term value. Middle-class consumers are often the most vulnerable, as well.
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From high-interest auto loans to misleading “buy now, pay later” plans, experts said these common traps can quietly drain your finances and derail your financial goals.
Middle-class consumers should steer clear or at least use these products carefully.
Credit cards are not inherently bad — they can be a great tool for improving credit and earning rewards and points. However, that’s only if you are able to pay your credit cards off in full each month, said Ashley Morgan, attorney and owner at AFMorganLaw.com.
The benefits are quickly outweighed when you carry a balance and pay interest, Morgan said. “Using credit cards to finance things long term is not ideal and very costly. Debt can be an important tool, for example buying a house. But typically credit cards are high interest rates and not an ideal way to carry debt.”
If you need to finance things, look for zero-interest programs or lower interest loans instead, Morgan urged.
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Buy now, pay later (BNPL) programs like Klarna and AfterPay have become popular but can be financially dangerous when overused, Morgan warned.
“It can be easy to over spend when these BNPL programs push the low payment amount. It can make it easy to believe you can afford things that you cannot.”
Because BNPL programs offer the ability to finance things as small as grocery store purchases or restaurant orders, and you can use multiple BNPL plans, before you know it, you can easily be buried in debt.
“Additionally, since these programs delay payments, it may tempt consumers to spend more than they intend to or can afford to pay back,” Morgan said.
If you’re living paycheck to paycheck or had a big unexpected expense hit midway through paychecks, it can be difficult to wait for the next one. People may gravitate toward payday loans, but this can be a big financial mistake, according to Yehuda Tropper, CEO of Beca Life Settlements.
Payday loans often have “triple-digit APRs that trap you in a cycle of debt that becomes very hard to get out of,” Tropper said. If you need cash quickly, look instead into credit union emergency loans or community assistance programs.
