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Balance Transfer

Banks Always Get it Wrong

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Every time a bank rejects an application, they know they are getting it wrong.

Remember: risk management at a bank is a game of odds. Credit scores are built using historic data. They will look at profiles, and see which percentage were good (paid on time) and which percentage were bad (stopped paying).

So, for example, a bank may see the following: 50 percent of the people with more than $50,000 of credit card debt stopped paying their credit card bills.

Banks know that they cannot make money when 50 percent of their customers stop paying. So, all people with debt of more than $50,000 will be rejected.

That is a good decision for the bank. But 50 percent of the people would have paid on time. Banks tend to make the cutoff (where they draw the line for approval and rejection) at much lower odds of going bad. For example, if more than 15 percent of the people are likely to go bad, banks usually reject.

That means banks regularly reject populations where 85 percent of the people would probably pay on time.

So, if you are rejected, that does not mean you would not pay the bank back on time. In fact, odds are you would probably pay back on time.

The good news: we know how these scoring models work. Pay on time every month and do not max out your credit cards. If you just continue to do that, then your score will improve and your chance of acceptance will go up over time.

But, if you are rejected, don’t take it personally. The banks get it wrong all the time. And they know it.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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Fine Print Alert

Fine Print Alert: June 27, 2014

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We’re keeping an eye on the banks for you and calling out any sneaky changes they’re trying to make in the fine print. We also wrap up other news from the week as well as share some of our favorite posts from around the web.

Fine Print Alert

The Good

Barclays launched a 24-month balance transfer offer, with a 4% fee.  This is one of the longest 24-month balance transfer offers on the market.  You can read the full review here.

And the not so good

Taking a cash advance on a credit card has just become more expensive at Bank of America.  On a number of credit cards, including the Cash Rewards Credit Card for Students, Bank of America has increased the highest APR for cash advances from 22.9% to 24.9%.  As banks continue to hunt for revenue, expect interest rates, especially for cash advance, to continue its upward march.

MagnifyMoney News Wrap-up

Nick analyzed Pew Charitable Trust’s recently released report on bank overdraft fees.

Brian lists the five things you need to do after completing a balance transfer (#2 might surprise you).

Erin explains why it sometimes makes sense to let your credit score drop a few points.

This week’s Consumer Watchdog, Goofski overviews how the bank’s rarely negotiate. It often makes more sense to try a balance transfer instead of just looking for them to lower your interest rate by a few percentage points.

Stories from around the web

Kick off your Friday with some great personal finance stories from around the web.

Our team had a few stories go live on other sites:

Here are a few we enjoyed reading from the last two weeks:

My Worst Money Mistakes – Holly from ClubThrifty opening discusses some of her embarrassing money mistakes. We found the $1300 vacuum particularly amusing.

The Small Trick That Will Save You Big Bucks on Plane Tickets – Matt Becker from Mom and Dad Money illuminates a new travel hack we’d never heard about before.

Spent: Looking for Change – Aldo from Million Dollar Ninja reviews the new American Express sponsored documentary Spent: Looking for Change. These documentaries are really important to us. We were so inspired by the documentary Paycheck to Paycheck that we went down to Chattanooga, TN to see if we could help make a difference.

What I Learned Working for Michael Jordan – Steven from Even Steven Money talks about the money lessons he learned on the links while caddying for the legendary Michael Jordan.

Let us know about any fine print alerts via Twitter, Facebook or email ([email protected]

 

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at [email protected]

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Eliminating Fees

New Study: Overdrafts confuse, extract and exploit

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The Pew Charitable Trust has just released a report on bank overdrafts. Not surprisingly, the report shows that consumers are confused, unhappy and willing to take action. The report also shows that, although the median overdraft fee is $35, people paid an average of $69 for their most recent overdraft. In the majority of overdrafts people borrow less than $50 for fewer than 4 days.

So, people spend, on average, $69 to borrow $50 for 4 days. No wonder they are confused, unhappy and willing to take action. Overdrafts in the US are often more expensive than payday lending. And their structure makes them one of the most expensive forms of short-term borrowing in the world, as I have previously outlined here.

Unfortunately, the complexity of the system makes it difficult for people to understand the true cost of overdrafts, compare options and – when they do take action – switch to a bank that is actually better. At MagnifyMoney, we are trying to help people compare, switch and save.

Confused

52% of overdrafters do not believe they have opted into overdraft coverage.

One of the biggest myths out there today is that you can opt out of overdraft protection entirely. You can not.  Regulation E only allows you to opt out of overdraft (and avoid fees) for any ATM or debit card transaction. So, even if you opt out of overdraft coverage, you could still be paying overdraft fees on checks and electronic payments (like your car insurance that is debited monthly, or billpay that you complete online).

No wonder people are confused. They are told they can opt out of overdraft coverage, and they think they have. But then the car payment is automatically debited and they are hit with a fee.

Unhappy

Most overdrafters paid 3 or more penalty fees

An overdraft is simply a short-term loan. But, rather than charging interest on money borrowed, banks charge fees per incident. You make one mistake and get charged $35 (the famous $40 latte).

Even worse, many banks levy extended overdraft fees. Every day that you are overdraft could result in more fees being charged. At Bank of America, for example, you will be charged another $35 if you do not pay back your overdraft in 5 days. So, you could be charged $70 to borrow $5 for 5 days.

The report shows that 58% of people learn about their overdraft via the monthly statement or the mail. Given the time lag, that increases the chance that people will pay an extended overdraft fee. And it is not surprising that the average incident costs $69 in the study, compared to an average $35 fee.

This adds up to a lot of money. We looked at fee income by branch, and every single Bank of America branch is making nearly $1 million every year.

Willing to Take Action

28% of overdrafters say they closed a checking account in the past because of overdrafts. 19% wanted to discontinue the service.

Overdraft policy at traditional branch-based banks is like the song lyrics of Hotel California: you can check out, but you can never leave.

People trying to opt out need to recognize that they can not. They will only be able to opt out of debit and credit overdraft coverage. But checks and electronic payments will still continue to hit them.

Comparing overdraft policy between traditional branch-based bank accounts can be very difficult, and banks make it difficult on purpose. But, if your goal is to avoid the risk of either a $35 overdraft fee or a $35 NSF fee, it will be almost impossible to find a traditional bank that does not charge fees that high.

Only banks without branches (internet banks) are truly revolutionizing the way that overdraft fees are being charged. For example:

  • Ally Bank only charges $9 per day that you go overdraft.  And, if you have money in a linked savings account, they will transfer the money at no cost.
  • Axos Bank has no overdraft fees and no NSF fees
  • Capital One 360, the internet-only bank of Capital One, will transfer money from a line of credit for free and will only charge interest for the days that you borrow the money. They treat an overdraft like the loan that it is, and dramatically reduce the costs as a result.

We find it interesting that Capital One has re-written the rules on overdrafts for their online bank, but have kept the old system in place for their branches.

People are angry and unhappy. But, switching from one traditional bank to another will not solve the problem. And opting out will not provide complete protection. For people looking to eliminate overdraft fees entirely, they will need to consider branch-free banking.  You can compare bank accounts here.  And we have put together some educational material (including video) on overdrafts as well.

Banks will continue to charge overdraft fees as long as they can get away with it.  The fees are completely out of proportion relative to the service provided.  I encourage you to consider ditching your traditional bank completely.  I switched to Ally, and haven’t looked back. With overdraft fees, you are paying a lot for the convenience of a bank, and you have to ask if it is worth it.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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