12 Things Banks Don’t Want You to Know
Almost no one reads the bank's fine print. Here, are some of the top things that your financial institution is not telling you.
Fees are a bank’s bread and butter. With the economy slowing in the late 80’s and big losses in the mortgage industry, banks were looking for consistent source of revenue. Hence a plethora of fees were born, and the whole financial world rushed to adopt them. Fees are everywhere in the banking world, both seen and unseen: overdraft fees came first. Shortly after, constant barrage of fees on services that use to be free, like accounts, checks, document preparation, and many others. I am going to break down some of the most offensive fees and tricks so you can avoid being a cash cow for your banking institution.
When ATM’s were first introduced, they were free. In fact, they reduced labor costs and saved banks money. Then in 1988, the first bank saw an opportunity to develop a whole new source of funds. The fees were low at first but continued to increase as people became more dependent on the service. Using a competitor's ATM can cost an arm and a leg. The average ATM service charge quadrupled between 1998 and 2017. Increasing every year till now, with an average fee of $4.69, and some even reaching $6-$8. In 2018, overdraft fees brought in $34.3 billion in revenue, yes you read that right, BILLION.
There’s a few simple ways to avoid getting the blunt end of these charges. First, let’s break down the way these fees operate. If you hit an ATM for $40 and you pay the average charge of $4.69, you are paying the equivalent of 11.7% to access your own money. Sometimes you may be in a bind, for example, on a recent cruise around NZ the ship’s piercers’ desk lost its ability to process credit card payments and advances. We were held hostage by the ships ATM. The fee was $20. If you’re ever caught in this situation make sure you get all the money you need the first time. This is the key to getting around the ATMs pickpocketing fees.
Many people hit the ATM and then have to get more money later. Instead of the previous example of $40, with a charge of $4.69 or 11.7%, pull a larger amount, like $400, that way the rate will only be 1.2%. It’s instinctual when we see a large access fee to recoil and only get the bare minimum. The banks want you to access multiple times, that way their returns are huge.
Another trick is to avoid ATMs all together. If your cash supply is low, use a credit card instead. I know you are probably thinking that credit cards have high interest rates, but if you pay off each purchase within the monthly billing cycle, credit cards have no fees. If you are traveling overseas check out Capital One’s cards. They don’t charge international exchange fees, and they don’t allow other processers to either.
The overdraft fee is legal theft. Overdraw your account by $10 dollars or less and the bank charges a $35 fee or more. That’s over 350%. Many banks specialize in low-income customers and will lure them in with a free account knowing that there is a high chance of them over drafting. If you find yourself caught in this trap, switch to a cash base so you can avoid overdraft and have more spendable income.
Banks will also clear checks before they clear deposits. Some banks will re-order your purchases in a day, from the highest amount to the lowest and charge a fee for each transaction. Or if you have a deposit and purchases going through on the same day, the bank may run the purchases first. I have seen this practice result in hundreds of dollars in overdraft fees. Make sure your deposits postdate your outflow by at least a day to be safe.
Banks can also delay clearing your check for a number of reasons under the guise of ensuring everything is above board. This delay can easily see you fall into the red and have to pay yet more overdraft fees. They also receive millions of dollars annually by camping on their customer’s deposits. Today, computer networked transactions transfer money from one account to another in Nano seconds. Yet, the funds will not be cleared for days or even a full week. The banks are collecting interest on those billions of dollars every day.
When you take out some form of credit, the bank will often try to sell you some insurance to cover your payments in case something happens to you. However, the bank’s plans often contain small print that explains that it won’t actually cover ALL of the debt. You’re better off making other plans. Bank insurance is a huge profit market. They routinely charge two to four times what a regular insurance company will for a similar policy.
Regardless of what your credit card agreement says, you can never be sure how much interest banks will charge you. Nearly all credit cards have a default rate as high as 30%. Banks apply these rates when you do something wrong, usually after you have a late payment.
Also, in their agreement there is usually a stipulation where they can do routine checks of your credit. If they deem you to be an increased credit risk, they can escalate your rate, even if you have made every payment on time. The bank knows that the higher the rate, the greater chance you will default.
Banks can also change the terms of your agreement, raising rates when they like. Their goal is to generate fee income, and they have plenty of ways to accomplish it.
If you have fallen victim to one of these traps, you can opt out of the raised interest rate and pay off the balance at the old rate. The downside is that you can never use the card again.
Never mind the interest rates, banks and mortgage companies really cash in on fees that come with your mortgage, like: administration’s fees, doc prep fees, and exit charges. Be sure to read the small print so you know exactly what additional fees you may have to pay. Do your homework and take the time to compare apples to apples when getting a mortgage loan. Usually banks are slower to process loans and they tend to charge more fees. The exception is when you have a good relationship with the president of a smaller bank or the mortgage loan officer.
The College Campus Scam
Students are the customers of the future, and banks are courting them right on campus. More than 120 universities have cut deals with banks to issue students credit cards even if they have no job. Schools can make millions from these deals, sometimes even taking a small cut of individual purchases.
The bank is hoping that the student is irresponsible and ruins their credit. The aftermath is that the bank will charge them higher interest rates for up to 7 years, and the financial industry wins again. One of my daughters had a devastating personal experience with this one. They offered her rewards for signing up for cards. She said she got one card so she could get a big bag of peanut M&M’s. She had all of her cards closed and it took her 4 years to get them paid off. Even after her debts were squared, it took years to re-establish credit in her name.
Banks Are Excited About Your Trip to Europe too
When you travel overseas, every transaction comes with big fees attached. Take out cash from an ATM anywhere overseas and you'll get hit with a foreign-transaction fee, plus a fee for using an out of system ATM. All told, it can cost up to $7 just to withdraw $200.
Credit card purchases aren't much better. Visa and MasterCard charge 1% of the purchase for converting currency. And the issuing banks may take another piece, which can add 3% to your purchase.
If you travel frequently, try the Capital One credit card, which charges no overseas-transaction fees, they even refuse to pass on Visa and MasterCard's 1% fee to customers. Call to make sure your particular card is still covered under this provision.
Also, ask your bank about partnerships with foreign banks in the country you are visiting. Bank of America, for example, partners with Barclays Bank, saving its customers $5 per transactions when using Barclays ATMs in the U.K.
Your Bank might not be the best place for your money
Banks offer several ways to earn interest on your money, including simple savings, CDs, money-market accounts, and IRAs. But they don't always yield the best return. The average savings account today, pays about 1% interest. But even in this low interest rate climate, you can do better, 3% or more, if you shop around. It pays to be a free agent. There is a huge disparity in the returns offered.
The inflation rate for 2018 was 2.44% so if you received 1% your money in your bank although the balance has increased at the end of the year, that money in that account will buy 1.44% less goods and services at the end of the year. You are losing buying power every year.
Smaller is Often Better
Banks have been consolidating like crazy over the last 3 decades. In 1990, the top 10 banks controlled 25% of the market, now they control 77%. Big banks offer many conveniences, such as a larger network of ATM’s that you can access for free country wide, but those conveniences come at a price: higher fees. The 10 largest banks generated 54% of revenue from fees and service charges. In contrast, the 10 smallest banks generate just 28% from those sources.
Not only do big banks bring in more fee income, but they also pay out less interest. According to the FDIC, smaller banks generally pay higher rates of interest. The latest collected data shows the 10 largest banks paid an average 1.87% in interest across their product lines, while the smallest banks paid 4.37%.
Smaller institutions are more likely to treat you like a person. They often look past a few shortfalls without fee punishment. And yes, the bank can remove their fees, but you have to ask. If the customer service person won’t refund or remove the fees, ask to speak to a supervisor. In my consulting firm, I worked directly for the CEO of the bank. I have found that the higher you go up, the more likely you’ll be successful in what your asking, they tend to be the friendliest and they don’t like saying no to customers.
The bottom line is: you don’t have to be used or bullied by the banking system. The more you know and understand the fees and tricks the easier you can avoid them and keep your money exactly where it is meant to be, in your hands.