Extended Warranty Rip-Offs

Updated on December 5, 2007.

JUST WEEKS BEFORE THE birth of David Bieler's daughter, his digital camera went kaput. No worries, thought the 36-year-old from Poughkeepsie, N.Y. That's what the $100 extended warranty he'd purchased was for. He quickly shipped off the camera along with an urgent-sounding note that he'd need the camera back right away.

Little Jocelyn was nearly three months old by the time the camera was returned to him. He had long since purchased a new one.

Extended warranties on appliances and electronic devices are a huge business. They're offered by retailers and third-party providers on everything from washing machines to Apple (AAPL) iPods. But what sounds like a great idea when you're in the store, experts and burned consumers warn, might not be worth the added cost. Consumer Reports has concluded that extended warranties are often a waste of money simply because many products tend not to break down during the first few years of service. And even when something does go wrong, you might have a tough time getting it fixed thanks to the small print on your contract or, in Bieler's case, the hassle factor.

Since extended warranties are claimed so rarely, the profit margins on them run as high as 40% to 80%, says Marlys Harris, finance editor for Consumer Reports. That can pad a company's bottom line nicely. During 2004, in fact, nearly 100% of Circuit City Stores' (CC) and 50% of Best Buy's (BBY) operating income came from extended warranties, say analysts. Is it any wonder that the big box retailers aggressively push these contracts?

That said, there are certain situations when an extended warranty might make sense — like when you purchase something expensive, such as a $6,000 Viking range, or an electronic device, like a plasma TV. But in most cases, consumers are better off skipping this option.

Still not convinced? Read on.

It's Already Covered
Most appliances and electronic devices come with a one-year warranty from the manufacturer. Some products, including washing machines and dishwashers, guarantee specific parts for even longer, says Chris Hall, president of RepairClinic.com, a web site that sells parts for appliances. Refrigerators, for example, have a unique sealed refrigeration system, which is by far the most expensive component to repair, and is typically under guarantee for five years, says Hall.

Your credit card might also extend your warranty at no added cost. All American Express cards — even the entry-level green card — will double a warranty up to one year. All Visa Signature and MasterCard Gold, Platinum and World cards offer the same service. To claim your benefits, call your credit card company or issuing bank, and be prepared to submit your receipts and the original manufacturer's warranty. (The documentation requested may vary with each issuer.)

It Probably Won't Break Anyway
According to a recent survey by Consumer Reports, most products today are very reliable. After three years of use, the likelihood that a major appliance such as a refrigerator (without an icemaker) or a digital camera will need a repair is just 8%. The item most likely to break down is a desktop PC, at 37%. See the full list below. (To check the reliability of specific brands, you'll need a subscription to the Consumer Reports web site, which costs $26.)

When it comes to appliances, the majority of repairs are needed within the first year, when the product is still under the original warranty, says RepairClinic.com's Hall. If a product can make it through the first year, chances are it will continue to function well for the next four, he adds. "I personally feel you are buying an extended warranty at the wrong time, when you are least likely to need it," Hall says.

The same goes for electronic devices, says CNET's editor and columnist Thomas Merritt. Most of the products CNET has tested over the years have turned out to be pretty reliable, and come with good standard warranties. Most problems are manufacturing defects that tend to show themselves early on.

A Few Exceptions
When purchasing a very expensive item, an extended warranty might make sense. Alan Wang, a 40-year-old New York resident, decided to buy an extended warranty for his $5,800 Sub-Zero refrigerator, since it's not the type of item he could easily replace. The experts we spoke with agreed that his decision made sense.

CNET's Merritt warns that the large high-definition televisions have lamps inside of them that have a tendency to burn out. An extended warranty that covers that part might make sense. Some companies consider the lamp issue part of normal wear and tear and won't cover it, he says.

One Last Warning
In the rare case that your appliance or electronic device does break down, you might have a tough time getting it repaired. That fine print on the extended warranty contract can be harder to interpret than the Constitution. (How does one define normal wear and tear?) And even when the defect is covered, you could find yourself at the bottom of a very long waiting list.

Third-party repair shops often make a lot less money from a warranty company than when dealing directly with a customer, says RepairClinic.com's Hall. So don't be surprised if there's only one outfit in town that will fix your washing machine. As Bieler learned the hard way, your warranty might guarantee you service, but there's no limit on how long it could take.