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Consumer Watchdog

Don’t Make Payments via iTunes Gift Cards. It’s a Scam.

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iTunes Gift Cards

Thanks to the Federal Trade Commission, we’re more aware of money wiring schemes. We know to send emails from long lost relatives requesting a wire transfer directly to spam. And to ignore mail from companies promising us a huge cash prize after we pay a “small fee” through money wire. What they really plan to do is get their hands on that small fee and then disappear.

Unfortunately, whenever we catch on to a scam, career criminals become more resourceful. The newest way to scam people out of cash is through iTunes gift card.

How iTunes Gift Card Scams Work

The reason con artists like to request money wires is it allows you to send money far away. It’s also difficult to recover money once it’s wired. A credit card payment, on the other hand, may be trackable or even reversible.

Sending money through iTunes gift card presents the same opportunity as a wire transfer. It’s difficult to track where the cash goes after the gift card is drained. If you find out later you’ve been scammed for money, the chances that you’ll get the money back that was on the card are slim.

Here’s how the scam works: Someone will ask you to buy an iTunes gift card, then tell you to give them the serial number on the card. Once they have the serial number, they either drain the cash on the card or sell the card online.

A scammer may ask you to use an iTunes gift card to give them money for various reasons, including some of the same reasons that are common with wire transfers, like:

  • Assisting a relative or friend in need
  • Repaying an old debt
  • Pay for an item being sold online
  • Paying a fee to accept a prize
  • Paying back taxes

The Scam to Look Out for Growing in Popularity

At the beginning of this year, the Treasury Inspector General for Tax Administration (TIGTA) reported that since October 2013 over 5,000 people have fallen victim to IRS phone scams and paid out over $26.5 million as a result.

One popular IRS phone scam is when someone impersonating an IRS or Treasury agent threatens arrest, deportation, and other consequences if you don’t pay up.

What’s one way they ask you to pay a phony tax bill? You guessed. iTunes gift card.

Since ignoring a valid tax bill can result in wage garnishment and even jail time, we’re all hyper-vigilant of any correspondence from the IRS. But, if someone calls to demand a tax payment with an iTunes gift card, something is wrong.

When the IRS wants to get your money for real, they will not resort to threatening you over the phone for payment right away. You get an opportunity to appeal. They will never ask you to pay through iTunes gift card. If you’re uncertain of a request for payment, go to the IRS contact website and reach out to the agency directly.

What to Do If You Get a Request for iTunes Gift Card

Crooks are good at what they do. They know the buttons to press to get a victim to fall for the con. If someone’s living paycheck to paycheck, a prize scam is going to look mighty enticing. If someone’s petrified of going to prison, they may be more inclined to pay these “taxes” to avoid the slammer.

Don’t act off impulse when any gift card is in the equation. iTunes gift cards should only be used to make iTunes and App Store purchases. Apple has even addressed this problem on the website.

According to the Apple gift card page:

“iTunes Gift Cards are solely for the purchase of goods and services on the iTunes Store and App Store. Should you receive a request for payment using iTunes Gift Cards outside of iTunes and the App Store, please report it at ftc.gov/complaint.”

4 Safer Ways to Pay or Get Paid

One way to avoid the iTunes gift card scam and any other scam that involves a money transfer is never sending cash to someone you don’t know. When circumstances come up where you need to exchange money for personal or business use, there are better avenues to do so than iTunes gift cards, here are a few:

1.PayPal

Signing up for a PayPal account is free, but there are some fees for certain transactions. Here’s the fee schedule for sending money:

Sending Money Domestically

  • From your PayPal balance or bank account – Free
  • From your debit or credit card – Flat fee of $0.30 plus 2.9%

Sending Money Internationally

  • From your PayPal balance or bank account – 0% to 2%
  • From your debit or credit card – 2.9% to 5.99% plus a fixed fee based on the payment currency

If you sell a product or service through PayPal, there’s a 2.9% + $0.30 fee per transaction for the seller (and an even higher fee for international transactions). Buying from a merchant with PayPal is always free.

2.Venmo

Do you casually exchange money with family and friends? Venmo is part of PayPal and a solution for small, quick transactions between people who know each other. It’s particularly useful on the go, when dividing a restaurant bill for instance. No more getting stuck with the bill!

Download and sign up for the account for free. Then add money to your Venmo account balance or link your Venmo account to your bank account, debit or credit card. Data security is always a concern when adding your financial information to any online account. Venmo uses data encryption and secure servers.

Sending money with a debit card is free for major banks. Debit card transactions from some smaller banks may have a 3% fee. All payments through credit card cost 3% as well. Credit cards may also incur a fee.

3.Square Cash

You can use Square Cash for personal and business use. If you’re using the app to send and receive money from family and friends with your bank account, you can do so for free. You will pay a fee if you have to send money through credit card and that fee is 3%.

Using Square Cash for business isn’t free, and you’ll have to note that you plan to accept payment in exchange for products and services when you set up an account. The processing fee for businesses is 2.75% per payment received.

4.Google Wallet

Google Wallet works similar to each other system we discussed above. You can download the app for free on your iPhone or Android. To send money, you just need either the email or phone number of whoever the money is going to. Google Wallet also comes with 24/7 fraud monitoring which is unique. Sending and receiving money with Google Wallet is free.

Always Report a Scam

If you encounter anyone requesting iTunes gift cards for payment, run for the hills. And make sure to report it. You reporting a scammer may prevent someone less suspecting from falling for the same person’s con.

Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor at taylor@magnifymoney.com

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Should You Shop with Fingerhut? (Probably Not)

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Should You Shop with Fingerhut

Plenty of consumers today either make a proactive choice to ditch credit cards or are unable to gain access to one due to a low credit score or non-existent credit history. In response, payment processors like PayPal offer a credit service where shoppers can finance purchases with online retailers – but more and more independent businesses are following the trend and offering their own lines of credit for online shopping portals.

Fingerhut is one such website. Fingerhut acts as a catalog that focuses on being able to finance your purchases. The site allows you to purchase and receive items now, and then make monthly payments on what you ordered to pay for them in full over time.

But is it really shopping on credit now and paying later?

How Fingerhut Works

Fingerhut is an online shopping portal that sells “everything from furniture and bedding to jewelry to the latest electronics.” All purchases are made on a line of credit extended by the company and customers must repay their balances with monthly payments.

You’ll receive an answer immediately when you apply for credit, and some customers are able to start shopping instantly. Purchases that aren’t paid off in full after buying accrue interest, with an APR of 25.15%. There are no annual fees.

Fingerhut offers two programs for customers to receive credit: the Fingerhut Advantage Revolving Credit Account and the Fingerhut FreshStart Credit Account.

The Revolving Credit Account “may or may not require a one-time down payment when you place your first order.” The company states that this isn’t a fee, but a charge that will be applied to your order.

In comparison, the Fingerhut FreshStart® Credit Account is backed by WebBank and acts as an installment credit program. You’re required to make a $30 down payment on what you want to order. If you make payments on time and in full, Fingerhut promises to change your account to the Revolving Credit Account (and up your credit limit).

You cannot transfer balances or take cash advances from either credit option, and your credit can only be used with Fingerhut.

Screen Shot 2016-02-11 at 11.42.48 AM

Who is Being Targeted?

Fingerhut doesn’t require membership, but you do have to apply for their lines of credit before you can shop with them.

The site targets people with no or poor credit who may be declined for lines of credit with other retailers. If you’ve been declined for a store card at your local department store, for example, Fingerhut’s offer may look particularly attractive: you get to finance your purchases even with poor credit.

The main reason people shop with Fingerhut is because the company offers popular, name-brand products and allows you to finance them instead of having to purchase what you’re looking for outright. The site is legitimate from that standpoint – you can charge items to your credit account, they’ll ship after you make a down payment, and then you can repay the balance monthly.

But consumers need to beware before signing up, applying for credit, and heading to the checkout page.

Buyers Need to Beware

Prices of items listed on Fingerhut are considerably higher than other retailers, and there’s little benefit to buying items on the line of credit they offer. Those with bad credit scores won’t see much improvement to that score by using the site, and there’s no reason to attempt to boost your credit score by purchasing material goods from an online retailer.

If consumers need to purchase on credit, they’re often better off charging something to a credit card (or saving up cash to buy what they want). Fingerhut’s prices for the items themselves are higher than in other stores, and their interest rates are often even higher than the rates on credit cards.

And customers aren’t building credit with any company beyond Fingerhut. The site claims that they “can help shoppers build buying power with us,” which is not the same as building credit history. Instead, try building credit history with a secured card.

Choose More Sensible Shopping Alternatives

Fingerhut’s online catalog features a huge variety of items that you can order now and pay for later. But by the time you’ve paid off your purchase, there will be much more cash out of your pocket than necessary. Through Fingerhut, you’ll pay more for your item itself than you would if you purchased at another store – and you’ll pay interest on top of that, too.

If you don’t have the cash in hand today, take a step back and look at your budget to understand why. Are you overspending? Do you really need the item you’re trying to buy, or is an impulse purchase? Is there something else you’d rather do with your hard-earned money than spend on material goods, like saving up for a goal or investing for your future?

If you decide you do want to buy items like the ones you can find on Fingerhut, it still makes sense to choose other alternatives for your shopping needs. In the long run, it’s much cheaper to buy what you’re looking for through other retailers. You can still shop online and get better deals on overall price.

Use coupon sites to look for codes and discounts, and check out online shopping portals like Amazon and eBay to hunt for the best deals. Set up price alerts to be notified when things go on sale and plan purchases carefully to make the most of the money you want to spend.

Kali Hawlk
Kali Hawlk |

Kali Hawlk is a writer at MagnifyMoney. You can email Kali at Kali@magnifymoney.com

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Protect Yourself from Tax Scams

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

 

Tax return check

Updated for 2016

Tax time is coming which means crooks are looking to part you and your money. There are a myriad of tax scams, but two of the most common right now are early filing and fraudulent calls.

File Early to Protect Yourself

Consider this scenario: you put off filing your taxes until April. You go through filling out all the information with your preferred tax filing software and as you click the final submit button a screen tells you that you’ve already filed and received your refund.

There is a rise of scammers using personal information to file early and steal refunds. In fact, it’s predicted tax-refund scams will net $21 billion by this year.

The best way to prevent your return from being stolen is to file as soon as your tax documents arrive.

Decoding a Fake Call Scam

Another common scam comes in the form of fake calls or threatening text messages claiming to be the IRS. Often, the caller/texter will demand the taxpayer makes a payment to the IRS or face being arrested, deported, or suspension of a driver’s license.

Crooks ask for money to be sent via wire transfer or a pre-paid card. This money is nearly impossible to recover once it’s sent, so victims who do give into the demands are likely to never see the money again.

The IRS issued a statement in 2013 stating the agency never asks for credit card numbers over the phone nor requests pre-paid debit card or wire transfers. In fact, the first communication about a tax-related issue is through the mail.

These scammers sure aren’t rookies though. In 2013 the IRS reported some of the characteristics of these scams include sophisticated tactics to convince potential victims the IRS was indeed calling.

Here are some characteristics of the call scam:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim

Information found in a 2013 IRS press release

What to do if you receive an phone call from the IRS you suspect is a phony:

  • First, stay polite but firm on the phone (just in case it really is the IRS). Say you have heard IRS scams are prevalent and you’ll need to ensure this isn’t a scam by reaching out yourself to the IRS and then hang up.
  • Second, if you’re sure you don’t owe any additional taxes to the IRS, report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
  • If you think you may actually owe back taxes to the IRS, call the IRS directly at 1.800.829.1040 and work with an employee to pay back what you owe.
  • Be sure to report the scam by filing a complaint using the FTC Complaint Assistant; choose “Other” and then “Impostor Scams.” Be sure to note if it included an IRS impostor by writing “IRS Telephone Scam” in the notes.

Tips taken from IRS.gov.

Don’t Download Email Attachments

Stay vigilant about email scams as well. Any email that’s sent to you claiming your tax payment was rejected or you owe back taxes need to be verified before clicking on links or downloading attachments that likely contain malware. Call the IRS directly to see if the email is legitimate.

Protect Your W2

Thieves can also use mail theft to wreak havoc on your financial life. A W2 or 1099 features nearly all the information an identity thief would need to impersonate you. Social Security number, check. Address, check. Full name, check. Employer and salary, check, check.

Because of this, it’s not uncommon for thieves to pull tax forms right out of the mail.

Your employer was required by law to send you tax forms by February 1, 2016

Keep a list throughout the year of companies that should be sending you a W2 or 1099. If you don’t receive your documents by February 8, 2016 — then be sure to reach out and inquiry when you should expect your tax forms and ensure they were sent to the correct address.

If you’re concerned your identity may have been compromised, you can put a credit alert or credit freeze on your credit report with all three bureaus (Experian, TransUnion and Equifax). You can also download your credit reports for free to look for any suspicious activity at annualcreditreport.com.

Don’t wait to report scams 

Scams need to be reported immediately to the Federal Trade Commission (FTC). You can also hear an example of a scam IRS call here.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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Consumer Watchdog

How to Spot 5 Popular Work-From-Home Scams

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

How to Spot 5 Popular Work-From-Home Scams

We’ve all seen deceptive work-from-home job ads before. They promise work that pays thousands of dollars each week with no experience necessary.

Of course, it sounds too good to be true. But more money and the freedom to work from home is something we all want, so you may be inclined to give one of them a shot. Before you do, know that there are a few dead giveaways that a work-from-home opportunity is really just a scam.

How to Spot and Avoid Work-From-Home Scams

The phrase, “You have to spend money to make money,” is one that scam artists use to get over on you. If you have to dish out a few hundred dollars for membership, certifications, training or equipment to work for a company, you need to make sure you’re spending money on something valuable.

Don’t invest until you’ve taken a look at company reviews from reputable sources like the Better Business Bureau. You can’t trust any old website for an honest review. Sometimes website owners are affiliates who get a cut of the profit if their review gets you to buy into a scam. Unbiased forums are a better source of reliable feedback.

There’s also no such thing as easy work. Be wary of jobs that sell a lifestyle where you earn a good deal of money from hardly any effort. When a company sells an image and nothing tangible, you have to wonder where the revenue comes from to run the business. If it looks shady, trust your gut.

Finally, any recruiter that contacts you asking for information to get you started in a program, like your Social Security number or address, should sound fishy to you. There’s nothing stopping them from taking your information and then stealing your identity.

Top 5 Work-From-Home Scams

Now, let’s talk about some of the top work-from-home scams you should avoid.

1. Pyramid Schemes

Often pyramid schemes look like real opportunities for entrepreneurs. A pyramid scheme recruits sellers of a product that has no value. It charges some sort of entrance fee for membership, training or inventory. The fee is then redistributed as income for participants at the top of the pyramid.

A minuscule group of people actually makes money. The top earners use groupthink and sketchy sales tactics to convince lower level sellers they can make tons of money recruiting other people. In reality, pyramid schemes are illegal and very few people make money.

A close cousin to the pyramid scheme is multi-level marketing or MLM, which is legal. The difference between the two is with MLM distributors earn commission from selling a real product (example, diet supplements or make-up).

Distributors also earn commission on the sales of those people they recruit. MLM gigs aren’t an outright scam, but you shouldn’t expect one to replace your full-time income. There’s also a chance you won’t make your money back if you have to buy the inventory you are going to sell.

2. Mystery Shopping or Survey-Taking

Now, there are mystery shopping and survey-taking opportunities that are legit. But like with all good things, a few people find an angle to scam people out of money. You shouldn’t have to pay for access to mystery shopping or survey gigs. You can find them online for free. If a membership site guarantees you a full-time income from either hustle, you should probably question its validity.

3. Online Business

Online business is the hot industry right now. Successful online business owners can earn over 4 or 5 figures per month with affiliate marketing and other various products. Who doesn’t want a piece of that action?

Some products sold to help you launch an online business are worth your time, others not so much. Systems that promise quick results are unrealistic, especially if you don’t know how you’ll be making money until you buy into the scheme.

There’s no way to make fast money online – or anywhere for that matter. Even if someone’s method of earning online is viable, they’ve probably been working at it for a while. Before you pay for something, seek unbiased reviews.

4. Data Entry or Medical Billing

Work-from-home data entry scam sites guarantee to get you hired and paid well by legitimate companies. You have to pay to become a member of the site. In return, you’ll get access to training, support and exclusive job listings. All you need is a computer and wireless connection – no experience.

Think about this from the perspective of a company that’s hiring a remote worker. Would you partner with a website that has a pool of workers with no experience? And if so, how much would you intend to pay these employees? Probably peanuts.

Instead of creating partnerships with companies, some sites just post gigs and other resources you could find online yourself if you did a bit of digging.

Another popular work-from-home scam is medical billing. A company asks you to investment in equipment, training and industry connections to launch your own billing business. But again, it’s difficult to earn your money back.

5. Envelope Stuffing and Craft Assembly

The envelope scam is one that’s been around for a while. Ads claim to pay you hundreds of dollars per day to stuff envelopes from home. To sign up for the gig, you have to put in your personal information. If this were actually real, the envelope-stuffing budget of a company would be astronomical. These scammers have an ulterior motive for signing you up.

A similar scam is where a company sends craft parts to you and pays for assembly. Again, there are more efficient ways for a company to assemble products than shipping parts off to remote workers. Don’t fall for it.

Are There Legitimate Work-From-Home Jobs?

After discussing all the scams, you’re probably wondering if there’s any real way to make money from home. It’s possible. It’s just not easy. Companies that pay remote workers good money look for people with experience and skills. You have to apply and qualify for full-time remote work just like any other job. That’s unless you launch a business selling your own skills or products.

If you’re just looking to earn side income, try sites like SwagBucks, Mechanical Turk, and UserTesting. These sites ask you to do small online tasks like reviews and surveys with no fees to sign up. You won’t be able to quit your day job with this income, but you’ll actually get paid for your time.

We all like a good shortcut to money and scammers know this. If you see an opportunity to cut corners and earn big money while wearing your pajamas (minimal effort required), it’s probably a scam.

Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor at taylor@magnifymoney.com

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In Auto Lending, Dealer Discounts Are Dangerous And Potentially Predatory

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

MagnifyNews-02-01

This week, the Wall Street Journal reported that the Consumer Financial Protection Bureau’s crackdown on racial bias in auto lending could result in higher prices for many borrowers. Over the last few years, the CFPB has aggressively fined large auto lenders for charging higher interest rates to minority borrowers. In 2013, Ally Financial was ordered to pay $80 million in damages to harmed African-American, Hispanic, Asian and Pacific Islander borrowers. In addition, Ally also had to pay $18 million in penalties.

Although the CFPB does not have oversight of auto dealerships, it does have oversight of indirect auto lenders like Ally. Typically, auto dealerships will sign deals with multiple auto lenders. The lender will set a risk-based interest rate, called the “buy rate.” The interest rate charged to the customer can never be lower than the buy rate. Higher risk borrowers with lower credit scores would be charged a higher buy rate. For example, a lender may set a 4% buy rate for someone with a 750 FICO, and an 8% buy rate for someone with a 650 FICO score.

In addition to the buy rate, there is a “dealer markup.” Dealers try to get as much as they can, and for good reason. Historically, dealers have been allowed to add up to 2.5% to the buy rate and they are able to keep a big portion of that extra interest as revenue. So, the higher the interest rate charged by the dealer, the more money that the dealership will make on the loan. Auto dealerships make most of their money from financing and warranties, not from the sale of automobiles. And the dealer markup is a disproportionately large contributor to the dealership’s earnings. That is why MagnifyMoney always recommends that borrowers shop around for an auto loan interest rate before walking onto a car lot. Dealers have a lot of room to negotiate, and can often beat the rate that you find online before you shop for your car. But if you do not come prepared with good financing already in hand, dealerships will do their best to charge the highest interest rate possible.

Many savvy auto shoppers understand how the game works. As a result, they are ready to negotiate hard with auto dealers. People who negotiate at dealerships tend to get much lower interest rates. People who don’t feel confident negotiating often end up paying more.

The CFPB performed an analysis of the borrowers, and determined that minority borrowers paid higher interest rates than white borrowers. The difference ranged between 0.2% and 0.3%. The statistical analysis has been widely disputed by lenders, dealerships and the Wall Street Journal. Car lenders complained because the CFPB was fining them for the activities of auto dealers.

In response to the CFPB actions, auto lenders have responded by eliminating or dramatically reducing the dealer markup. To make up for lost revenue, the buy rate has been increased. Before, good negotiators could get better rates than bad negotiators. Now, that ability to get a lower interest rate has been largely removed. Some borrowers will see higher interest rates, and some will see lower interest rates.

Fixing Interest Rates Is Not A Bad Thing

Economists generally believe that bartering is not an efficient way to manage supply and demand. Although tourists often enjoy bartering when on vacation, most people are happy that prices are fixed in grocery stores. Imagine if every item in a grocery store had a base price, and then a mark-up on top. When you take your items to the cashier, you are forced to negotiate on every item’s price. In this system, pricing goes down for those who are most willing or able to negotiate. But prices overall remain higher than they should. With fixed costs and transparent pricing, supermarkets are forced to compete systematically.

Unfortunately, auto financing has remained largely on the inefficient barter system. Rather than a national competition between lenders fighting to offer the lowest interest rates for people with certain FICO scores, the negotiating takes place behind closed doors in the back of auto dealerships.

Whenever you empower an employee to negotiate price, there are unintended consequences. Early in my banking career, banks would often allow branch employees to set the interest rate of loans. Here are some examples of the type of abuse that can happen:

  • A racist branch manager gives African American borrowers rates that are 2.5% higher than interest rates charged to white individuals.
  • An aggressive sales agent wants a big commission, and gets aggressive with the most vulnerable. Customers who had the least education, the lowest level of financial literacy or the least self-confidence would be charged higher interest rates.
  • A young, recent college graduate is enjoying his new pricing power. Whenever a young, beautiful woman comes into the office, he reduces the interest rate.

When I worked in banking, we regularly eliminated the ability of front-line sales agents to charge higher prices. But why has the barter system survived in auto lending?

Why Did This Happen In Auto Lending?

Why were auto lenders willing to give so much power to dealerships? Unlike credit cards, which banks can sell online or in branches, auto loans are usually sold in dealerships. The dealers are not controlled by the finance companies or banks. And the dealers want to make the banks compete. Banks would give auto dealerships big dealer markups to buy loyalty. Auto dealerships would be told that they could keep what they were able to charge. Banks would compete on the lowest buy rates and the highest markups.

A bargain-based system is inefficient, painful and particularly punitive for people who are least likely to bargain. At MagnifyMoney, we support transparent, public and painless pricing structures. Although we agree with the Wall Street Journal analysis that pricing will increase for many borrowers, we do not think that is necessarily a bad thing.

Competition should be systematic. A 750 FICO borrower should be able to shop for the best interest rate without having to fear a painful negotiation in the back room of an auto dealership. Lenders will still have to compete. However, going forward, anyone with a good risk profile will benefit from market competition, rather than side-deals for those who are the best at negotiating.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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A Bill Of Rights Has Been Created For Small Business Borrowers

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

MagnifyNews-02-01

Today, a coalition of nonprofit and industry lenders, credit marketplaces, brokers, think tanks and small business advocates launched the Small Business Borrowers’ Bill of Rights in Washington, DC. Small business borrowers are not afforded many of the same protections that consumers receive. Unlike consumer credit, small business loans do not have uniform disclosure requirements. Lenders do not need to disclose all fees before a loan application, and lenders do not need to calculate an APR. As a result, it can be very difficult for potential borrowers to comparison shop and find the best deal. Given the limited disclosure requirements, lenders have created increasingly complicated pricing structures that rely upon a myriad of “low” fees. However, if the fees were converted into an APR, the effective cost would often be higher than 30%.

Karen Mill, the former head of the US Small Business Administration, said that “seeing industry and other stakeholders take responsible steps like this toward ensuring the basic rights and safeguards is noteworthy and will help shape the dialogue going forward in a way that protects America’s small businesses, without stifling innovation and access.” She is a keynote speaker at the event where the Bill of Rights will be announced.

The Bill of Rights focuses on six key protections. The first focuses on providing borrowers with clear disclosure of pricing and fees, including a commitment to providing an annualized interest rate. No longer will borrowers be confused by seemingly low fees. For example, a low 3% fee can actually translate into a 36% APR, which is higher than a cash advance on a credit card.

The second commitment is to avoid abusive products that trap borrowers into a vicious cycle of re-borrowing. Many products in the market are structured similarly to payday loans. There are small fees that are charged, and then the entire balance is due. The small business owners are given a choice to pay the interest coupon, or renew the loan. These types of products are created to keep borrowers in debt. Instead, amortizing loans, where principal is reduced with each payment, can be a much better and safer option for borrowers.

The third commitment is to responsible underwriting. A lot of small business lending focuses on collateral. A lender will give you the loan so long as you have collateral that can be offered as protection. But the lender pays very little attention to the actual cash flow of the business or the ability of the business to service the debt. In risk management, this is called “second way out lending.” Imagine if mortgage underwriting was done this way. The lender ignores your employment or income, and just focuses on the value of the home. When that type of lending occurs, many more foreclosures take place. That type of abuse needs to be removed from small business lending.

The fourth commitment is a right to fair treatment by brokers. Because the interest rates are so high on many small business loans, the lenders make a lot of money. And because they make so much money, lenders are happy to pay big commissions to brokers who find customers. A big percentage of the small business lending market is still dominated by brokers. Brokers end up having a bad incentive. Some of the worst products for the borrowers pay the highest commissions to brokers. As a result, many brokers steer borrowers to bad products.

The fifth commitment is a right to inclusive credit, without discrimination. Consumer lending has become largely algorithmic and data-driven. As a result, it becomes more difficult for lenders to discriminate. However, there is a lot of judgment and human intervention in small business lending. As a result, the opportunity for abuse and bias is greater.

The sixth commitment is to fair collection practices. In small business lending, harassment of borrowers has been widely reported. Just as consumers have strong protections from bad collection practices, small business owners deserve the same.

The Bill of Rights is an attempt at self regulation. The CEOs of a number of lenders, including Lending Club and Funding Circle, have signed and committed their organizations. You can see the details of the consumer protections and the names of the companies that are participating at www.ResponsibleBusinessLending.org.

 

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Consumer Watchdog, News

Citibank Fined $35 Million And Forced To Reimburse $700 Million To Customers

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Today the Consumer Financial Protection Bureau (“CFPB”) announced a $35 million fine for Citibank. In addition, it has ordered the bank to reimburse $700 million to consumers who were victims of deceptive marketing, unfair billing practices and deceptive collection practices. In a consent order, the CFPB used aggressive language to describe the actions of Citibank. For years, Citibank sold insurance products, credit monitoring and fraud protection protects to their credit card and store card customers. Those products included AccountCare, Balance Protector, Credit Protector, Payment Safeguard, IdentityMonitor, DirectAlert, PrivacyGuard and Citi Credit Monitoring Services. The CFPB took issue with how these products were sold to consumers. Citibank was also charged with over-billing consumers and extracting excessive fees from consumers in collections. The client reimbursements are supposed to happen automatically. If you think you should have been reimbursed, you can complain directly to the CFPB via their website.

Deceptive Marketing

Add-on insurance products historically have been sold aggressively by call centers and, for store cards, at the checkout counter. The CFPB found example of misrepresentation by the sales agents. For example, customers were told that the first 30 days were free. However, they were still charged for the first 30 days. In another example, customers were told that they would not be charged if they paid their balance in full. However, the customers would have had to make payments before the statement is produced. If there was a statement balance, consumers would be charged.

For the fraud products, Citibank over-stated the benefits. Customers were told that the product would detect fraudulent purchases. However, the product only had access to bureau data. And bureau data only has balance data, not transactional data. Citibank was not monitoring transactions for fraud, although they made that claim in their advertising.

During the sales process, consumers often did not realize that they were enrolling in the program. And there were examples of consumers being enrolled even though they were not eligible for benefits. For example, some credit protection policies may not cover self-employed individuals. However, even though Citibank knew that cardholders were self-employed and ineligible for benefits, they were still sold the product.

Collection Practices

For certain store card relationships, Citibank would offer “pay by phone.” There was a $14.95 fee to pay by phone. During the phone calls, the representatives did not make clear that the fee was to expedite the payment, and ensure it posted on the same day. Instead, the agents implied that the fee was charged for all phone payments. Many consumers paid the expedited payment fee when they didn’t need to make that payment.

Citi To Change Its Practices

Citibank will be reimbursing customers up to $700 million. $479 million will be given to customers who were the targets of deceptive marketing. $196 million will be paid to customers who were enrolled in credit monitoring services. And $23.8 million will be given to customers who paid excessive “pay by phone” fees. Citi is required to “conveniently repay consumers.” In other words, Citi cannot set up a process where consumers need to reach out. Instead, the burden is on Citi to reimburse its customers automatically. Some reimbursements have already happened, and more are on the way.

In addition, sales practices, fees and billing practices will be changing at Citi to ensure these breaches will not happen again.

Should We Ever Buy These Products?

Add-on products have generally been a bad deal for consumers. Call center agents typically receive large bonuses to sell the products. The value for consumers is usually low. And the objective for the bank is to sign up consumers into a recurring billing product. The chance of a consumer canceling or claiming is very low.

As a general rule, consumers should avoid buying insurance from providers of loans. If you need life insurance, you should shop around for term life insurance that covers all of your needs, not just your loan or credit card balance.

Credit monitoring is now basically a free service. Websites like CreditKarma, CreditSesame and Quizzle all offer free access to your credit reports. CreditKarma can help you set up basic fraud monitoring. There is no real reason to pay for this advice any longer. And if you want the best form of fraud protection, you should put a fraud block on your account. That is the best way to ensure your account is not compromised. And if you want true transaction monitoring, you should sign up for alerts with each of your credit cards individually.

But there is an even simpler rule. If you are ever being sold insurance at the end of any purchase, you should probably avoid buying it. Insurance is great. But you should shop for it and find the best deal. And it should protect all of your needs. If you call customer service to make a payment, and then hear “for less than the cost of a Pepsi a day, you can protect your family,” you should probably just hang up.

Although these fines are steep, they are still much less punitive than equivalent fines of British banks in the UK. Not only did customers receive a refund, but the refund was compounded at an 8% interest rate annually. Although the $735 million will be painful to Citibank, management should feel lucky that British regulators didn’t set the fine.

 

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Consumer Watchdog

Consumer Watchdog: Steps to Handle Abusive Bank Practices

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Over half a million J.P. Morgan Chase customers will be receiving restitution from the banking giant. The CFPB and 47 states, plus the District of Columbia, determined J.P. Morgan was guilty of selling “zombie debts” to third-party collection agencies when the customer’s debt was either inaccurate or in some other way not collectible.

This large glitch happened as a result of the bank using robosigning – a practice in which individuals sign documents on the assumption they are correct instead of doing the due diligence to read it through. The company also sold bad credit-card debt.

J.P. Morgan will be paying $50 million in restitution in addition to other fines.

According to the Wall Street Journal, the states will share $95 million, the CFPB will receive $30 million and the Office of the Comptroller of the Currency will also receive $30 million.

This comes less than two years after J.P. Morgan was ordered to refund $309 million to 2.1 million credit card customers and pay $80 million in fines for allegedly making errors in hundreds of thousands of debt-collection lawsuits and encouraging more than two million credit-card customers to purchase services they didn’t actually want.

What Can You Do?  

It is important that you are always vigilant about monitoring the people you trust with your money.

What should you do if you feel your bank is engaging in abusive practices?

1. Read the fine print

What did you agree to when you signed up with the bank? Did you give the bank the authority to engage in whatever practice you now feel is wrong? For example, transaction reordering is legal and banks can use it this practice, even if you don’t like it.

2. Address the issue with the bank

Before bringing in the big guns, you should see if you can get the problem solved with the bank directly. Perhaps the mistake was merely a glitch or a one-time occurrence. But if you feel it’s a consistent trend with your bank, you do have other options.

3. Talk to the Consumer Financial Protection Bureau (CFPB)

The CFPB makes it really simple to get help. You can find a wealth of information on its website and submit a complaint.

Here is how the CFPB explains what happens after you submit a complaint:

We’ll forward your complaint to the company and work to get a response. After we forward your complaint, the company has 15 days to respond to you and the CFPB. Companies are expected to close all but the most complicated complaints within 60 days. You’ll be able to review the response and give us feedback. If we find that another agency would be better able to assist, we will forward your complaint and let you know.

4. You can shop around for a better deal

If you are unhappy with your financial institution, there are a lot of other options out there for you. We keep an extensive list of top-notch checking accounts and savings accounts for you to consider. We even rank them based on transparency and simplicity. 

Customize your checking acount offers with comparison tool

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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Consumer Watchdog, Eliminating Fees, News

Banks Generate $30bn Of Abusive Overdraft Fees

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Banks generated $7.65 billion of overdraft revenue during the first three months of 2015, according to the Wall Street Journal. On an annualized basis, banks are poised to generate $30.6 billion in overdraft revenue this year. Despite the passage of Regulation E, multiple lawsuits and the threat of regulation from the Consumer Financial Protection Bureau (“CFPB”), fees have only reduced by 4% compared to 2014. Overdraft fees have historically accounted for an outsized percentage of checking account revenue at the largest banks in the country, and it looks like these fees will remain a meaningful contributor to revenue in the near future.

Are Overdraft Fees Predatory?

The average overdraft fee is about $30 per incident. In addition, many banks charge extended overdraft fees. At some banks, it can cost $70 to borrow $6 for six days as a result of the extended overdraft fee. Even worse, nearly 50% of banks in the country will re-order transactions to increase the number and amount of overdraft fees charged. Rather than debiting money from your checking account in the order that the debits occurred, banks often debit your account in the order that they wished the transactions would have occurred.

Because overdrafts are so expensive, the vast majority of people avoid them. In Europe, an overdraft line of credit is a cash management product that makes sense for everyone. Keeping too much cash is expensive, because it could be better invested or placed into a long-term certificate of deposit. People of all economic backgrounds take advantage of generous overdraft lines of credit, which charge very low interest rates. Borrowing $6 for six days would only cost a few pennies in most large European banks.

However, American banks have made going overdraft a sin and high overdraft fees the punishment. As a result, people with money have completely avoided overdrafts. Only a small percentage of the population uses the overdraft product. 8% of bank customers generate 75% of overdraft fees. Overdrafts have become a short-term borrowing mechanism for people who have no other option. And overdrafts offered by banks are often more expensive than payday lenders. The typical payday lender charges $15 to borrow $100 for 2 weeks. As I mentioned in the Bank of America example, large banks are charging much more than that.

A banking practice is considered predatory when it meets a few definitions:

  • It targets people with low income or limited financial means
  • It charges a price that is dramatically higher than the cost of providing the service
  • It has opaque and complicated pricing that makes it difficult to understand the true cost of the product
  • It charges the fee when someone is in a vulnerable position and has few alternatives

Overdraft fees meet all of those requirements. The price of an overdraft is dramatically higher than the cost of providing the service. Banks charge an average of $30 to decline a transaction, which costs the bank close to nothing. When banks approve a transaction, credit risk is taken. However, the banks are charging effective interest rates above 400% in the form of fees. The banks are addicted to the revenue, which is why the revenue remains despite the backlash.

As overdrafts become more expensive, fewer people will use the service. Banks will extract more revenue from people who have fewer funds and a lower net worth. In my opinion, overdrafts are predatory and action is required.

Isn’t The Situation Improving?

Most headlines have reported the reduction in overdraft fees. And a 4% reduction is material. This reduction has come from banks eliminating high-to-low transaction ordering and putting limits on the number of overdraft fees that can be charged per day. At many banks, it used to be unlimited.

However, banks have not reduced the headline rate. Bank of America has been bragging about its commitment to the customer. But lets look at what they have really done:

  • The overdraft fee remains $35 per incident, and 4 incidents can happen each day
  • The extended overdraft fee remains in effect, charging $35 after 5 days
  • The bank eliminated the option to opt in to debit card and ATM overdraft fees. However, very few people are opting in to this service

In short, the changes have been cosmetic. And without rules from the CFPB or competitive pressure, I doubt the policy will change. The poorest Americans will continue to find Bank of America more expensive than most payday lenders.

What Alternatives Exist

I personally do not like doing business with institutions that create intricate webs of “gotcha” fees. That is why I switched to Ally Bank, which has virtually eliminated overdraft fees from its product offering. Most internet banks have done the same thing, and you can compare accounts here.

Unfortunately, if you need a branch, most branch-based banks remain expensive. And most credit unions are not far behind, charging $25 when the big banks are charging $30. Community banks, credit unions and large banks are all getting fat from these fees. Despite the regulatory pressure, lawsuits and negative press, our nation’s poorest will give banks another $30 billion of overdraft fees this year.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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College Students and Recent Grads, Consumer Watchdog

Consumer Watchdog: Why You Should Make Bi-Weekly Student Loan Payments

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Making a monthly payment to chip away at student loan debt can seem as if you’re merely throwing money into the abyss. Those a few hundred dollars a month towards tens-of-thousands of dollars in debt (with interest attached) can take a decade or more to eliminate. But don’t start to despair quite yet. Yes, it can feel like an overwhelming amount of debt – but there is a small tweak you can make to your repayment plan to shave off time and interest owed.

This glorious student loan repayment hack is as simple as dividing in two: making bi-weekly student loan payments.

What are Bi-Weekly Payments?

Let’s say you have $30,000 in student loans at a 4% interest rate. You’re making a monthly payment of $225.

At this rate, it will take you 177 months (nearly 15 years) and cost $9,780.96 in interest to repay your loans.

But instead of making one monthly payment of $225, you can split your payment into bi-weekly payments of $112.50. Just divide your monthly payment in half. You’re still paying $225 a month, but this small tweak will save you $1,175.52 and shave 18 months off your student loan repayment. Both federal and private lenders usually allow for the bi-weekly payment structure.

Why Bi-Monthly Payments Work

So how does this financial miracle happen? Simple math of course.

The year is made of 52 weeks, so you’ll be making 26 of those bi-weekly (half) payments. This means you actually end up making 13 full payments a year instead of 12.

Before you freak out about how you can afford to make 13 payments instead of 12 keep in mind this payment structure probably applies to your job too. If you get paid bi-weekly, then there are 2 months a year you get paid 3 times.

Other Ways to Reduce Time and Money Spent on Student Loans

If you get a bonus or unanticipated money, never hesitate to throw more money towards your loans to help chip away the principal balance. Just make sure the money is being applied to the current principal debt and not future bills.

We’d also recommend you round up. If your minimum payment each month is $225, shoot for paying $250 per month. Adding 25 extra dollars per month will add up quicker than you think, especially if you’re paying bi-weekly.

One Potential Glitch to Keep in Mind

A bi-monthly payment structure can save you a lot of money, but you have to be sure to execute it correctly.

Both your half payments must make it to your student loan provider before the due date. If you fail to submit the payment on time, it could result in a penalty for paying below the minimum required.

A simple way to keep this process going smoothly would be to set up auto-pay. Just make sure that you readily have funds available in your checking account to cover the payment when it’s due. A best practice would be to time it with your bi-weekly paycheck getting deposited.

Looking to Refinance or Consolidate?

Dealing with a bi-weekly payment on just one student loan would certainly be easier than doing it for multiple providers. If you’re considering consolidating or refinancing your student loans, then be sure to check out our student loan refinance table. You should always do your due diligence and evaluate potential rates, benefits offered (like unemployment protection) and the perks you may lose by consolidation or refinancing. Keep in mind, refinancing federal loans comes with certain consequences like losing eligibility for forgiveness or income-based repayment programs.

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Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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