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Updated on Monday, February 1, 2016
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.