Tag: OVERDRAFT

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4 Sneaky Ways That Banks Can Trick You, According to a Former Banker

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4 Sneaky Ways That Banks Can Trick You

When you work in banking for nearly 15 years, the way MagnifyMoney co-founder Nick Clements did, you come away with what can only be described as an insider’s knowledge of the ins and outs of the business. Clements certainly did, including some of the sneaky ways that big banks trick us into spending our money.

Here are the four big ones that Clements suggests consumers be on the lookout for.

1. Retroactive Interest

Unless you’ve been living under a rock the past couple of months, you’ve probably become familiar with the “free 0% financing!” offers that tend to be pushed pretty aggressively by retailers and credit card companies during the holidays. If you’re not careful, though, those 0% offers could end up costing you a pretty penny in the form of deferred interest. What happens with this type of card is that interest for purchases made on it will be set at 0% for a certain number of months. If you can pay your card off in full at the end of that time period, great — you’ve made the most of the offer. If you carry over a balance, however, interest will then be retroactively charged at the standard purchase rate, which tends to be much higher than average on these types of cards. Check out this piece for more about deferred interest and how to avoid it.

2. Re-ordering transactions

If you have overdraft protection on your account, this sneaky little trick could really sting you, and nearly half of banks still do this, says Clements. What happens is that banks will reorder your transactions throughout a day to maximize the number of times that you pay overdraft fees. Consider this example: You start the day with $50 in your account. You then make three withdrawals throughout the day, the first at 10 a.m. for $20, the second at 1 p.m. for $20 and the third at 7 p.m. for $40. In this particular scenario, you should have only overdrawn on your account at the third transaction, right? The trick happens when your bank reorders your withdrawals so that the $40 happens first, then a $20 and then the final $20. In this case you would have actually overdrawn twice. This sneaky little move is surprisingly legal, and incredibly unfair. For more on how to eliminate overdraft fees, check out this piece.

3. More overdraft woes

Besides what’s mentioned above, another issue can come up with overdraft protection when you try linking your credit card to your checking account. In doing so you may inadvertently get charged two fees right away when you overdraw — the first being an overdraft transfer fee from your checking account and the second being a cash advance fee on the credit card. If that’s not enough, the balance on the credit card is then treated as a cash advance, says Clements, which means there’s no grace period and interest begins to accrue right away, and at a much higher rate.

4. Grace period problem

In most cases, the simple act of completing a balance transfer onto a new credit card will cause the consumer to lose their grace period on purchases. The only time this isn’t usually the case is when a specific 0% offer for purchases has been made for the card. Use this tool to help compare different balance transfer options on different cards.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Cheryl Lock
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Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at cheryl@magnifymoney.com

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Banks Generate $30bn Of Abusive Overdraft Fees

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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.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Nick Clements
Nick Clements |

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

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Regions Bank Fined $7.5 Million For Overdraft Abuse

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This week, the Consumer Financial Protection Bureau (“CFPB”) fined Regions Bank $7.5 million for unlawful overdraft practices. In addition to the fine, Regions Bank has refunded approximately $49 million of fees to customers. Regions Bank is based in Alabama and has more than $119 billion in assets, making it one of the largest banks in the country.

Regions Bank was fined because it failed to receive the necessary opt-in from consumers, delayed fixing the problem for a year and mis-represented certain fees to its consumers. The CFPB has been looking closely at the overdraft practices of banks. Director Cordray has made it clear that he is not a fan of the way banks treat overdrafts, and bigger reforms are expected later this year. In the interim, we can expect more fines of banks that are violating existing rules and guidelines.

Regions Bank earned $218 million during the first three months of 2015. The CFPB fine does not represent a significant portion of the bank’s earnings.

Abusive Overdraft Practices

Overdrafts in the United States are incredibly expensive for consumers, and unimaginably lucrative for banks. During 2014, banks generated over $30 billion of overdraft fees. When you look at how banks charge overdraft fees, you can see how easy it is for banks to generate so much revenue.

If you make a transaction in your checking account without having sufficient funds in your account to cover the transaction, you are at risk of being charged an overdraft fee. Imagine you have $100 in your bank account, and you try to write a check for $120. The bank has two choices: it can approve the transaction, or decline the transaction. If the bank declines the transaction, it will charge a non-sufficient funds (“NSF”) fee. The average NSF fee is $35. If the bank approves the transaction, it will allow the account balance to go negative. In effect, the bank gives you a loan. Banks charge, on average, $35 for an approved overdraft. So, you will pay $35 if you are approved, and $35 if you are declined.

Even worse, most banks have an extended overdraft fee. For example, Bank of America will charge an additional $35 if you do not bring your balance positive within 5 business days. Some banks even have a per day charge.

Some banks offer “overdraft protection.” That means you can link your checking account to a savings account or credit card. If you spend money that is not available in your checking account, the bank will sweep the money from the linked savings or checking account. However, most banks will charge a transfer fee, which averages $10. Given that most savings accounts only pay 0.01%, you would need to have $100,000 in your savings account in order to earn $10 in one year.

Even worse, if you link your credit card for overdraft protection, the sweep will be treated as a cash advance on your credit card. In most cases, that means you would be subject to an additional cash advance fee and interest would stat accumulating immediately at high double-digit rates.

As if the overdraft process wasn’t complicated enough, many banks reorder transactions to increase the overdraft fees. According to Pew, nearly 50% of banks engage in high-to-low transaction processing. Imagine you have a balance of $100. You make a purchase at 9AM for $10 (your new balance is $90). At 10AM you make another purchase for $10 (and your new balance is now $80). And then at 1PM you make a purchase for $100. The last transaction would cause you to go overdraft, resulting in a $35 charge.

50% of banks would reorder the charges, from highest to lowest. In this example, they would process the $100 transaction first, reducing your balance to $0. The other two charges would each cause the account to go overdraft. As a result, your fee would be $70 instead of $35. And that is all perfectly legal.

Consumer Protection

You do have certain rights. You can opt out of overdraft protection for ATM and debit card transactions. That means that if you use your debit card to make a purchase, and there is not sufficient money in the account, the transaction would be declined and you would not have to pay an overdraft or NSF fee.

However, you cannot protect yourself against checks and other electronic (bill pay) or recurring transactions.

Are There Cheaper Options?

Overdrafts can be incredibly expensive. The best way to avoid high cost overdraft protection fees is to consider an internet-only, branch-free bank. Many of the new start-up banks charge no overdraft fees and offer free overdraft protection from linked savings accounts. You can see some of these new providers here.

If you do not want to switch banks, you should consider opting out of overdraft protection, which will protect you from high fees on debit and ATM charges. You should consider linking your savings account or credit card, because the charges would still be less than standard overdraft fees. Finally, you should consider taking advantage of balance alerts to ensure that you are on top of your balance.

However, many people go overdraft because they have a short-term borrowing need. You should consider opening a low interest rate line of credit with your local credit union, or a personal loan from a marketplace lender. Credit unions and marketplace lenders offer significantly lower interest rates.

 

 

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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

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Big Changes at Ally Bank

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Big management changes at Ally Bank continue, with Barbara Yastine, CEO of the Retail Bank, resigning. Yastine left Ally only a few months after the appointment of Jeff Brown as Chief Executive of the Group. The former CEO, Michael Carpenter, left the firm in February and had long ties with Yastine, dating back to their days at Citigroup. When Ally went public in March 2014, it opened at $27.91. It has not been a smooth ride for shareholders, and the stock closed at $21.03 on Friday, down 25% since the IPO. In its first tumultuous year as a public company, Ally has lost its exclusive leasing contract with General Motors, its CEO and now the head of its Retail Bank.

Ally has demonstrated strong profitability, generating $1.2 billion of profit in 2014 and a Return on Equity of 7.9%. The business had managed to drive down funding costs via a hugely successful online bank, which was led by Yastine. In addition, Ally had worked through the credit losses of the inherited General Motors portfolio and was heading towards double-digit returns. The big question on shareholder and customer minds: where will Ally go next?

The Opposite of The Big Banks

Its name said it all: Ally Bank wanted to be very different from traditional banks. Ally was born during the financial crisis, when General Motors was rescued and the financing business (GMAC) was separated from the auto business. The Treasury invested billions in GMAC, and had majority ownership. In 2010, the business was renamed Ally. The mission of the business reflected the mood at the time: no one trusted banks, particularly auto lending businesses targeting subprime auto financing.

What made Ally unique was that it didn’t just brand itself allies of the consumer, it actually meant it. Its savings accounts had market leading interest rates, paying close to 1%. Not only were the rates high, but there were no minimum deposits, no minimum balances, no fees and an incredibly easy account opening process. In checking accounts, Ally differentiated itself even further. Ally introduced a truly free checking account, with no monthly fee and no sneaky minimum balance or direct deposit requirements. It changed the game with its approach to ATM fees. Ally offers unlimited reimbursement of other bank ATM fees. And it really staked its claim on overdraft fees. If you link your savings account, Ally Bank will transfer funds between the savings and checking account for free, compared to the standard $10 charge levied by traditional banks. And, rather than $35 per incident, up to $140 day of NSF (non-sufficient funds) and overdraft fees, Ally capped its fees to $9 per day. Ally didn’t decide to be marginally better than the rest of the industry. Instead, it completely rewrote the rulebook.

Its checking account received an A+ Transparency Score from MagnifyMoney. An honor only two banks in the country received.

You can almost imagine a team of former bankers (which they were) making a list of the worst sins and fees, and then reversing them. Ally was refreshing, and refreshingly profitable.

To fund the generous consumer accounts, Ally did not build a branch network. It built a truly digital bank, without the overhead of its competitors. And, more importantly, it viewed its deposit accounts as enablers of its lending business, rather than as a profit-center. If you read Ally’s investor presentation, you will the bank described as a “deposit franchise.” The key metric is the cost of deposits, rather than the fee income earned from those accounts. By managing the business in this way, Ally was able to focus on deposit growth and customer satisfaction, rather than extracting an extra nickel from its depositors.

But Ally also had history on its side. The deposit franchise was a cheaper way to fund subprime auto loans than the debt market. So, the faster the deposit franchise grew, the lower the overall group funding costs. This would give positive year-over-year earnings momentum.

Ally has now reached an inflection point. Future asset growth is in question, after the loss of General Motors. With an increasingly competitive online deposit market, Ally risks becoming a victim of its own success, and online deposits may start to look comparatively more expensive.

Back To The Future?

The new CEO spent his formative years at Bank of America. The question, for shareholders and customers, is whether or not he will continue living up to the Ally brand. Ally could use its brand and low-cost funding to transform other parts of the banking sector. Credit cards, personal loans and student loan refinancing are just three asset classes that could welcome Ally’s touch.

However, a quicker and easier way to increase revenue would be to increase the fees on its existing account holders. Ally could also lower the interest rate on savings accounts, as Capital One did to ING customers after the acquisition.

At MagnifyMoney, we are big fans of the Ally retail bank built by Barbara Yastine. We hope that Ally’s next step is to revolutionize other asset classes and product types, rather than reverting to type and increasing fees and reducing rates. Only time will tell.

 

 

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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

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Santander Agrees to Limit Use of ChexSystems

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On Friday, the Attorney General of New York announced that it had reached an agreement with Santander Bank. Starting from September 30, 2015 Santander will overhaul its use of ChexSystems and has promised to largely eliminate its use of “account abuse” screening which has made it impossible for many people to open a checking account. This follows recent agreements with Capital One and Citibank.

Many people have never heard of ChexSystems. Like Experian, TransUnion and Equifax, ChexSystems is like a credit bureau, except if tracks information related to checking accounts. If you go overdraft on your checking account and never pay back your fees, you will be reported to Chex. Like the credit bureaus, your information will stay in ChexSystems for 7 years. Overdrafts which remain unpaid for 60 days are typically reported, although there are no rigid reporting requirements.

A senior manager at Chase told MagnifyMoney that Chex is the “wild west” of reporting. Banks report to the database at their own discretion. Some banks could report for just a small unpaid balance. For example, one unpaid overdraft of $5 could keep you from opening another bank account for years. Because most banks tend to refuse to open accounts once you have negative information on your report, regardless of the severity.

Given the costs of financial services for the unbanked, the Attorney General’s office of the State of New York has taken an interest in the use of ChexSystems and its disproportionate impact on the poor. Santander Bank will continue to use Chex to screen for fraud. However, most overdraft infractions will now be ignored, allowing people to open bank accounts.

People have the right to request a free copy of their ChexSystems report once a year, and can dispute incorrect information. You can request your free report here and you can dispute incorrect information here.

We applaud the Attorney General of New York for championing this cause, and we hope that more banks abandon this practice. Ironically, banks could eliminate all overdrafts by declining any transaction that causes and overdraft and charging no fee for that decline. American Express has done just that with Bluebird, so it is possible.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Brian Karimzad
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Brian Karimzad is a writer at MagnifyMoney. You can email Brian at brian@magnifymoney.com

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The OCC Acts Unilaterally Against Abusive Bank Overdrafts

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Earlier this month, the OCC (Office of the Comptroller of the Currency) quietly issued Bulletin 2015-13, which announced the publication of a revised handbook on deposit-related consumer credit. The OCC is getting tough on bank overdrafts, which have come under increasing scrutiny for being predatory. At MagnifyMoney, we have long called overdrafts one of the most expensive forms of short-term borrowing in the world.

The last booklet was issued in March 1990, and was used by OCC examiners to assess a bank’s deposit-related consumer credit activities, including overdrafts. The new handbook has established standards which would dramatically change the overdraft products currently offered by banks in the country. If the banks actually follow the rules outlined by the OCC, we should expect a revolution in the way products are designed, priced and marketed. However, banks are very good at making minimal change in the face of new rules, particularly when significant revenue is at stake. Banks generated an estimated $32 billion in overdraft fees during 2013, so they will not give up this revenue stream easily.

Bank overdrafts are marketed by banks as a “protection” that can help a consumer if they are running short of cash, or if they make a mistake.  However, they are extremely expensive. If you do not have overdraft protection (a linked account), a bank will typically charge you $35 if they approve the transaction (an overdraft charge), or $35 if they decline the transaction (an NSF, or non-sufficient funds, fee). The fee is charged on a per incident basis, regardless of the actual transaction value. If the transaction is approved, the total amount of the overdraft (which includes the shortfall and fee) is due immediately. Many banks will charge an incremental extended overdraft fee if the account balance is not brought positive quickly. For example, it could cost $70 to borrow $6 for 6 days from Bank of America, based upon their overdraft fees and rules. In addition, even the method of posting transactions has caused controversy. Rather than posting transactions as they happen, nearly half of the banks in America re-order the transactions, posting the highest value transactions first, thereby increasing the number of times that an individual can trigger an overdraft charge.

Reg E did provide some additional consumer protection. It required banks to receive opt-in for overdrafts that are triggered by ATM cards (when withdrawing cash), and debit cards (when making purchases in a store). However, the regulation did nothing to protect all other forms of transactions, which includes checks, automatic payments, billpay and others.

Bank overdrafts in the United States raise every red flag imaginable. The incredibly arcane and complicated fee structures lack transparency and exist to extract maximum value from consumer mistakes or misfortune. The costs charged by the banks for what is effectively a line of credit are obscene when compared with the actual cost of providing those services. And, although banks like to point fingers at payday lenders and focus on their CRA activities on reducing the number of unbanked, many people have left the banking sector because overdrafts are more expensive than overdrafts.

The new handbook has some shocking new requirements, which we detail below:

  • Opt-in for all overdraft products: under Reg E, customers are only required to opt-in to overdraft protection for debit/ATM overdraft protection. However, the handbook requires proof of opt-in for all protection, dramatically expanding the scope
  • Banks will have to perform underwriting of customers before extending an overdraft product. The OCC explicitly requires an analysis of income and debt. which provides information for an affordability check.
  • Our favorite requirement focuses on “prudent limitations on product costs and usage.” Most importantly, the OCC states that “while permitting appropriate returns, fees should be reasonably correlated to the actual costs of offering, underwriting, and servicing the product as well as associated risks.” The OCC is particularly concerned about “repeated usage of high-cost, short-term loans for longer-term borrowing needs.”
  • Critically, the OCC requires that “banks should structure credit terms to reduce the principal balance of the loan over a reasonable period of time.” The worst form of short-term loan offers a customer a choice: pay off the entire balance today, or renew the product for another fee. This method, a favorite of the payday loan industry and copied by many deposit advance products, creates the perfect debt trap. Consumers are unable to pay off the full balance at once, yet banks do not offer an amortizing option. So, people just pay a fee and never get out of debt.
  • Finally, the OCC suggest that “banks should consider reporting payment information to credit bureaus.” Currently, the banks tend to report negative information, on a haphazard basis, to Chex Systems. Responsible customers are not able to benefit from on-time repayment. And an alternative credit reporting universe is created, with limited transparency.

Using common sense as our guide, these new rules make a lot of sense. Before lending someone money, make sure they can afford it. Don’t force people into the product: let them have a choice before you start charging them fees. Don’t rip them off with outrageous fees. And provide a repayment method that actually gives someone the chance of getting out of debt.

Overdrafts have become so out of control, that even these new rules will really shake up the overdraft market if banks actually follow the spirit of the requirement. However, I think banks will likely hire expensive law firms to build a robust defense. They will somehow prove that it actually costs $35 for an automated computer algorithm to approve a $6 loan. I just hope the OCC backs up these rules with strict enforcement. And we hope the CFPB builds on this and issues explicit rules that remove the predatory structure of these products.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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

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Citibank Forced to Rely Less on ChexSystems

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ChexSystems is a credit report for banking accounts. If you bounce a check or don’t pay an overdraft fee, you could have a derogatory mark on your ChexSystems file. Most people have never heard of the report until they end up on the negative list, which can make it impossible to open checking accounts anywhere else. Banks have almost complete discretion in how they report people’s behavior to the system. Many banks often refuse to let you open a bank account if you have just one bad mark. Chex reports are also known to have a high level of data inaccuracy.

The unbanked in America often find ChexSystems reports to be a huge barrier to lowering banking fees and escaping the fringes of the financial world, including payday lenders and money transfer services. Just one bad check could force you into the expensive world of check cashing providers for up to 7 years.

This week, the Attorney General of New York reached an agreement with Citibank. Although Citi is not being as progressive as Capital One (who no longer uses Chex for their checking accounts), it is making some big changes. Citibank will consult Chex for anti-fraud purposes, but the bank is altering its use of negative information going forward. Citi has promised that it will no longer refuse to open a bank account because of minor errors, like isolated examples of bounced checks or overdrafts.

Everyone should order their annual free copy of their Chex report, which you can learn to do here. We are pleased Citibank is eliminating its most egregious practice of banning someone from banking for years after just one mistake. We find the punishment for small overdraft infractions particularly hypocritical, given how much money banks like to make from overdraft fees.

However, we wish Citi would have gone further, and believe CapitalOne 360 still offers a better solution. Capital One is famous for its use of data, and our guess is that it understands the limited value of Chex Systems screening.

Keep up with the news and information about the best financial products by following us on Twitter @Magnify_Money and on Facebook.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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

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Bank Earnings Show Higher Rewards and Cheaper Loans

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Recent earnings announcements from Discover and Fifth Third show that we can expect the credit card rewards battle to keep heating up. And, thanks to the Consumer Financial Protection Bureau (CFPB), we can expect that short-term loans will finally start to get a little bit cheaper.

As we reported in our review of the Big 4 Banks (Citi, Chase, Wells Fargo and Bank of America) last week, savers and credit card borrowers at big banks should not expect any improvement in the deal that they are getting. The banks bragged about the continued reduction in the cost of deposits, and they maintained their high interest rates on credit cards. If you want a decent interest rate on your savings account, switch to an internet only savings account. The mega-banks continue to pay 0.01% on their basic savings accounts. And, if you need to borrow money, standard Purchase APRs remain high. Despite record low interest rates, banks are maintaining stable returns on their credit card businesses.

However, there were two pieces of good news from Discover and Fifth Third’s recent earnings announcements. They highlight two trends that we should expect in 2015: rewards on credit cards will get richer, and the cost of short term borrowing may finally start to reduce (thanks to the CFPB).

Rewards on Credit Cards

Banks make most of their money on credit cards when people cannot afford to pay off the statement balance in full. In bank language, they are called revolvers. When you do not pay the balance in full, you are charged interest. And the interest rates on credit cards are high. In a recent survey by MagnifyMoney, we found that 75% of people with credit card debt pay an interest rate higher than 15%.

In order to build balances on credit cards, the credit card companies increasingly offer rich reward schemes. The most lucrative rewards come from cash back credit cards or frequent flier miles. Banks will lure you with rich rewards, and then hope you spend more than you can afford.

Credit card companies are in aggressive growth mode. In 2014, credit card companies issued $319 billion of new credit lines, compared to $267 billion in 2013. And growth is expected to increase in 2015.

In order to stand out, the rewards are only going to get richer. Some banks will increase the value of the rewards they hand out, while others will make it easier to redeem by removing annoying terms, conditions and limitations.

Discover, the company that invented the concept of cash back, introduced last year a new redemption policy on the Discover it credit card. Historically, they would have a minimum redemption amount: there was a minimum $50 cash back redemption. So, if you only had $40 of cash back earned, you would have to spend $1,000 to earn another $10 of cash back before you could redeem. That has been changed, and there is now no minimum redemption threshold. That means people who spend less money can still get their cash back.

And, in the earnings announcement, we see that people have been redeeming. Discover took a charge of $178 million, which is the cost of higher redemptions. That shows that Discover actually did what it promised.

As competition continues to increase, we should expect to see higher reward costs from all credit card providers looking to attract new customers. If you pay your credit card balance in full, every month, you will be able to enjoy better rewards. However, if you can’t control your spending, you shouldn’t use reward credit cards because the rewards earned will be a lot less than the interest you pay.

Short Term Borrowing

As we have written previously, overdrafts are obscenely expensive ways to borrow. Big banks charge $35 per incident, and many banks pile extended overdraft fees on top. You could pay $70 to borrow $6 for 6 days.

The CFPB has promised action in 2015. Some banks will wait to see the new rules, and then do the bare minimum. However, other banks will likely try to be ahead of the curve.

One corner of the overdraft universe that has received a lot of attention is the deposit advance product. That is effectively payday lending, but completed by banks. If you have your money directly deposited into your bank, you can get an “advance” in exchange for a fee. The fee averaged $10 for every $100 borrowed. Given that people are typically paid every two weeks, that is the equivalent of $20 per month to borrow $100. These are shockingly high fees.

Even worse, these fees were charged by banks that had long-term relationships, data and the direct deposit coming directly from the customer’s employer. The banks did not need to charge fees at that level. They could make good money, and not obscene money.

Well, Fifth Third has decided to do just that. They reduced the fee to $3 per $100 advanced. They used to charge the industry average of $10. That is a 70% reduction. They expect to generate $100 million less revenue as a result of the change. But, they are still continuing with the business, which means it must still be profitable.

At MagnifyMoney, we believe that banks are uniquely positioned to kill the payday lending market. They have data, and in many cases they have the direct deposit relationship. Fifth Third Bank has made the bet that they can still make money by charging 70% less. That says a lot about what they used to charge, the power of the CFPB, and the potential for meaningful consumer savings.

We expect both of these trends to continue in 2015: higher rewards on credit cards and lower costs for short-term lending. The market is driving reward competition, and the regulator is driving lower costs on short-term borrowing.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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, Eliminating Fees

Wells Fargo and Overdrafts: They Still Don’t Get It

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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ChexSystems Big

Wells Fargo overdraft fees can be high. On its popular Everyday Checking account, overdraft fees are:

  • $35 for a basic overdraft. That can be charged up to 4 times a day, so you could be hit with $150 in overdraft fees if you go overdraft on 4 items in a day.
  • $12.50 to transfer funds from savings to cover an overdraft. That’s for every single time a transaction puts your checking account over, so you could be hit multiple times with this charge.
  • $35 if you use your debit or ATM card and overdraft. Wells Fargo offers a ‘Debit Card Overdraft Service’ which isn’t much of a service at all. It simply lets you overdraw your account with your debit card, and get socked with fees. You’re better off turning it off and having your transactions declined when you don’t have enough money in your account.

There’s no grace period for overdrafts, but if you are overdrawn less than $5 at the end of the banking day, no fees will be assessed.

And if you want a refund, unfortunately there’s no official policy to get one. Your best bet is to nicely call customer service or visit your branch and see if they can assist. Your better bet is to find an online bank with no overdraft fees and take your business there.

Recently, Wells Fargo lost its appeal to overturn a verdict requiring the bank to compensate customers $203 million for manipulating transaction posting in order to increase the amount of overdraft fees that they charged.

In 2001, Wells Fargo changed the order in which they posted transactions. Rather than posting transactions in the order in which they happen (which would seem obvious), they would batch post them from “high-to-low.” Essentially, they were posting transactions in the order they wanted them happen, rather than the order they actually happened.

Here is an example of how that can impact you. Imagine you start the day with $100 in your bank account. Then:

  • At 9AM you spend $10 at a coffee shop (new balance $90)
  • At 12PM you spend $25 on lunch (new balance $65)
  • At 5PM you spend $30 at the bar, and (new balance $35)
  • At 8PM you spend $50 at a restaurant (new balance -$15. You are overdraft)

If you processed the transactions in the order that they were posted, then you would have one overdraft transaction, costing you $35 (the typical overdraft fee).

Wells Fargo was not happy with making only one overdraft fee. So, they changed the rules. Instead of posting them in order, they waiting until the end of the day, and then posted the transactions from the highest to the lowest. Here is what that means. Your start with $100, and then:

  • Post the $50 restaurant transaction (new balance $50)
  • Post the $30 bar transaction (new balance $20)
  • Post the $25 lunch transaction (Overdraft #1, -$5 balance)
  • Post the $10 lunch transaction (Overdraft #2, -$15 balance)

Once you reorder the transactions, you increase the number of overdraft transactions. In the re-ordered example, you are now going to pay two overdraft fees, which would be a $70 charge (instead of $35).

When I explain this process to people, most people can’t even imagine that this could be legal. But it is legal. In fact, nearly 50 percent of banks still process transactions in this way.

In 2001, Wells Fargo clearly made this change to increase revenue. And customers clearly did not understand it. (In fact, it is such a crazy way to post transactions that it takes a bit of time to explain.) The lawsuit is not about the legality of high-to-low processing (which is legal). It is about false and misleading statements that cost people a lot of money.

Wells Fargo has been appealing. They don’t think it is misleading, and they don’t want to reimburse the fees that they charged. And they will likely continue to appeal. I find that the most distressing part of this case (and others like it). If banks continue to defend this practice, and the way the explained it to customers, publicly, then I have severe concerns about their ability to service customers.

Do you think you were a victim of this?

To find out the current status and how to claim, visit http://www.bank-overdraft.com. At this website, you can see exactly what you need to do

If you still have questions or concerns, you can and should make a complaint directly to the Consumer Financial Protection Bureau.

How to deal with a bank that thinks reordering is fair

Overdrafts, even without the devious cheating of transaction reordering, are some of the most expensive and extortionate ways to borrow short-term money in the country. A payday lender charges $15 to $20 for every $100 that you borrow. At the worst bank in the country (Citizens), you will pay $83 to borrow $100.

There is good news: new internet-only (branch-free) banks are looking to shake up the entire fee structure. Because they don’t have branches, they have much lower costs. And they pass that savings along to consumers by paying higher interest rates on savings accounts and eliminating virtually all fees.

You can find the best checking account for your needs in our checking account marketplace. And some of our favorites include:

  • Bank of Internet Rewards Checking, which charges no monthly fee, reimburses all ATM fees, offers a free transfer from savings to checking, and has no overdraft of NSF fees.
  • Ally Bank, which charges no monthly fee, reimburses all ATM fees, and will automatically transfer money from a high-rate savings account to your checking account for free to cover an overdraft. If you have no money, then you will never be charged more than $9 per day in overdraft fees

Want regular updates about the best financial products out there? Then sign up for our Price Checker Newsletter. Twice a month, we’ll deliver the best-of-the-best right to your inbox.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Nick Clements
Nick Clements |

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

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Eliminating Fees

The Best and Worst Banks for 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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Overdraft_lg_mobile vs trad

If you’re looking for banks with no overdraft fees, these two banks offer checking accounts that don’t charge any insufficient fund or overdraft fees:

The catch is if you don’t have any funds in your checking account, your transaction could be declined, but the bank won’t charge you any fee for declining the transaction.

Both of them are online-only, so you won’t have a branch to visit, but you can easily deposit checks via mobile apps and you can use a wide network of ATMs to access cash.

Recently, MagnifyMoney provided information to American Banker for a story on overdrafts. The CFPB has indicated that it will start treating overdrafts as short-term lending. We couldn’t agree more: overdrafts are short-term loans, plain and simple. However, because banks charge “fees” instead of interest, they get away with outrageous pricing. In my entire banking career, I have never seen a more expensive form of short-term borrowing than an overdraft at a large American bank.

In our analysis, we looked at a simple $100 overdraft. The customer would pay back the $100 in 10 days. And then we ranked the biggest banks to see which institutions charged the most, and the least.

The absolute worst bank was Citizens Bank, where it would cost $83.93 to borrow $100 for 10 days. The best was Ally Bank, where it would cost $9. (UPDATE: Ally now charges a $25 overdraft fee).

Why such a big difference? 

If you really want to save money on banking fees, you need to ditch the traditional brick-and-mortar banks. New, challenger brands like Ally (and others, which you can find on our checking account page) have completely re-written the rulebook. They just don’t charge punitive overdraft fees.

But, even with the big banks, there are big differences between them. Although the headline overdraft fee ($35 per incident) is high and relatively consistent, there are other bits of the fine print that you have to navigate. Namely:

  • How many times per day will they charge the fee? Some banks will cap the number of charges to just a few a day. However, Citizens Bank will charge seven times. Yes – seven times in a single day!
  • Is there an extended overdraft fee? Some banks will charge you again if your balance remains negative. At Bank of America, they will charge you $35 after five days. Citizens, the worst of the banks, will charge $6.99 per day, from day four. And Capital One will not charge any extended overdraft fee.

So, that $100 overdraft would cost $34 at Citi, and $71 at PNC.

What should I do?

At the very least, don’t bank with Citizens. Their pricing is outrageous.

The best option is to switch to an internet-only bank, where the overdraft fees have been virtually eliminated.

If you want to stick with a bricks and mortar bank, make sure you choose one that limits the per-day charge and does not have an extended overdraft charge. Citibank and Capital One Bank are both good examples in that category.

Why is American Banker doing this story?

Banks that depend upon overdraft fees for their income need to be concerned. This is “easy money” for them. Any time you have predatory pricing on lending, you can generate sizable revenues. But, those revenues won’t last.

Thankfully, the CFPB is going after overdrafts. We will see where it ends, but the profit pool will definitely shrink. American Banker was interested in seeing who are the winners (like Ally, who don’t depend upon overdraft fees), and who are the losers (like Citizens Bank). Not only can the losers expect to lose significant income streams in the future, but also they should be wary of potential punitive action, lawsuits and customer attrition.

Want regular updates about the best financial products out there? Then sign up for our Price Checker Newsletter. Twice a month, we’ll deliver the best-of-the-best right to your inbox.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Nick Clements
Nick Clements |

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

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