On May 12, the CEO and co-founder of Basic Capital posted a promotional video for the company on X. The video pitched how this company helps the average individual access funding for investment, helping them close the wealth gap. Not everyone was impressed with the idea.
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In response, Ramit Sethi, a New York Times bestselling author and personal finance influencer, tweeted that this kind of financial scheme is predatory and comes with staggering fees that will keep you from getting ahead. Sethi cautioned that while, historically, these schemes have targeted the very rich or very poor, many now have the middle class in their sights. Here are some common financial traps to avoid.
One of the newest payment methods available is Buy Now, Pay Later (BNPL). Through this short-term lending, consumers can use a company like Klarna or Affirm to buy something for a small portion of the cost and pay the remaining amount in several equal installments over time.
Making purchases more manageable through a payment plan isn’t a new concept. In the past, customers could buy an item on layaway, where a retailer would hold an item until the customer paid it off in full. However, with BNPL, the buyer can take their product home immediately.
The predatory practice occurs when a BNPL user is late with a payment. If customers pay all of their installments on time, they won’t need to pay interest, but there are immediate consequences if they miss a payment. Interest rates vary by the provider but are often significant. For example, Affirm and Klarna both charge up to about 36% interest for missed payments, which can quickly escalate to serious debt.
To compound the problem for borrowers, BNPL loans also encourage overspending. If you see something you want while shopping, it’s much easier to stomach the cost when you can split it into four payments over the next few months. As these purchases add up, paying off the debts becomes harder. According to the U.S. Consumer Financial Protection Bureau, 63% of borrowers take out multiple loans at the same time.
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If you can’t afford to buy and maintain a second home to visit in the winter, a timeshare allows you to enjoy your own vacation space for a short period. These investments let multiple parties purchase a vacation property together and agree upon times when each owner can visit. While timeshares can be good investments, the industry has developed a negative reputation in recent times.
Sales representatives often resort to high-pressure and misleading sales tactics to get prospects to sign a timeshare contract, such as overstating resale value, pushing limited-time offers and emotional manipulation. After signing, the purchaser may discover expensive hidden fees and maintenance costs. If they try to back out of the deal, they’ll find that the contract is full of language making it extremely difficult to cancel it. This has led many timeshare owners to try to sell their contracts at a loss, but the number of people attempting this makes it extremely difficult.
Earning a degree or getting a new certification is a well-known way to land a higher-paying job. Unfortunately, for-profit colleges often try to exploit this.
These outfits differ from traditional colleges because they exist to earn revenue for shareholders and owners. That means making money can become more important than the education of enrolled students. For-profit colleges offer some positives, like flexible or online schedules, fast-tracked programs and lower admission standards. However, according to the National Center for Education Statistics, a higher percentage of those who graduate from for-profit universities have consistently defaulted on their student loans three years after graduating compared to those from nonprofit and public colleges.
The tuition at these for-profit schools is often much higher than that of traditional universities, leaving students with large amounts of debt. On top of this, many have criticized these colleges for poor-quality courses that don’t lead to higher-paying careers. This combination of paying a high price without much to show for it makes many consider some for-profit colleges predatory.
One of the biggest debt traps for the middle class remains hidden in plain sight. In 2024, the average credit card APR was above 22%, and the average credit card balance per consumer was $6,730.
While it may seem like credit card debt would be more of an issue for the lower class, the middle class has the most. The Federal Reserve Bank of St. Louis divided U.S. households into 10 equal groups based on income, with the lowest 10% of earners in the first group and the highest 10% of earners in the tenth. Out of the 10, the fifth, sixth and seventh groups, representing the upper-middle class, had the most credit card debt.
While there is no clear reason why these middle class households have more debt, there’s speculation that low-income households can’t qualify for high credit limits, and high-income households may have more money saved.
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This article originally appeared on GOBankingRates.com: Ramit Sethi: If You’re Middle Class, Avoid This Financial Move ‘at All Costs’
