We launched MagnifyMoney because we believe people are paying too much in credit card interest, paying too many complicated overdraft fees and not earning enough on their hard-earned savings.
Banks are in the business of borrowing money from people in the form of checking and savings account deposits and then lending that money to people who need it through loans or credit cards. Right now, banks are charging very high rates on credit cards, and paying very low rates on deposits. They sit in the middle and enjoy rich profits.
But how much money are Americans leaving on the table (or in banks’ pockets)? We decided to conduct a national survey to see just how much money people are losing to the banks’ fine print and fees.
Of those surveyed, 73.4% of Americans keep their money in an old-fashioned branch bank account. That means they are likely receiving 0% on their checking account money and 0.01% on their savings account. Yes, the big banks are paying an average of 0.01% on their savings accounts – that is not a typo.
Of those Americans who have a savings account, the average amount sitting in the bank was was $28,696. If, instead of giving money for free to branch-based banks, people switched to FDIC insured online savings accounts, like the ones offered by Barclays, GE or Ally Bank, they could earn close to 1%. Rather than earning less than $5 a year, they could be getting over $250.
An overdraft happens when you spend more money than you have in your checking account. According to our survey, it has happened to 35% of us. But why do people go overdraft?
53% are just forgetful (mistakes happen).
47% of people go overdraft because they need the money: the month lasts longer than their paycheck.
Last year alone, Americans were charged $32 billion in overdraft fees. According to the CFPB, the amount in annual fees, on average, for accounts that had at least one overdraft was $225. Why so much? Every incident of overdraft costs $35 and banks will charge multiple incidents per day. For example, Bank of America could charge up to $140 per day – even if you only were overdraft by $20 (4 transactions).
Our survey showed that people are definitely fed up: 69% would like an account that does not let you go overdraft and charges no fee to decline. Fortunately, such products exist – like the internet bank Simple and Bluebird by American Express. We hope to help people find these products.
Credit Card Debt
42.4% of Americans have credit card debt. The average balance of those surveyed was $10,902.
Now, you will often hear that the average interest rate is 15%. However, at MagnifyMoney we know that credit card companies engage in risk-based pricing. That means lower interest rates are given to people who pay their balance in full every month and higher interest rates are charged to people who are likely (or have historically) revolved. That means they pay less than the full balance, and then have to pay interest.
Our data proves this. 75.7% of those with credit card debt, paid an interest rate higher than 15%. The average monthly payment on that debt is $408. At an 18% interest rate, that means the average American will pay at least $1,707 in credit card interest over the next 12 months.
Think about it this way: banks will pay (savings account deposits) 0.01% for money. So, for $10,902 a bank would pay about $1 in interest. Then they turnaround and charge the average American $1,707 in interest. Not a bad business.
Fortunately, there are options out there to help people save money. Fifty percent of Americans with credit card debt have considered a balance transfer. Of those who completed a balance transfer, 89% would do one again. However, there are still many misconceptions about balance transfers.
People don’t understand how the interest charges work — 31% think interest is charged retroactively and 35.2% don’t know how it is charged.
Some people don’t get the full benefit of the balance transfer because they spend on the card (46.7% of people do that) or by pay late (25% of people fail to pay on time).
Rather than looking online for the best balance transfer offers, an amazing 68.5% of people respond to a direct mail offer.
But, if you choose a market-leading balance transfer, pay on time and don’t spend on the card, the average American could save more than $1,300 over the next 12 months.
Personal loans could also be a great option if you can’t qualify for a balance transfer (or don’t trust yourself with another credit card). Only 36.5% of people with credit card debt considered a personal loan
The survey results are clear
At MagnifyMoney, we believe that people are not getting enough on their savings (less than $4 a year). We think they are being charged too much for overdrafts (an average of $225). And they are paying way too much for their credit card debt ($1,707 a year). We think the results of our survey are clear: people are paying far too much for their banking products and services.
The good news: alternatives exist.