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Eliminating Fees

How Overdraft Fees Silently Rip You Off

How Overdraft Fees Silently Rip You Off

It’s Thursday, the day before payday. You only have $50 left in checking and have forgotten that your gym membership of $70 will be automatically debited from your account today. Normally, you’d transfer a little bit out of savings to cover the cost if you needed to, but you didn’t do it in time. The bank approved your gym’s charge and now your balance is negative $20.

Whoops, you’ve gone overdraft.

33% of Americans have gone overdraft in the last year

In a recent survey, MagnifyMoney discovered 33% of Americans have gone overdraft in the last year. If you haven’t yet, it is bound to happen at some point. Either we make a mistake, or we actually run out of money.

Going overdraft in the United States – even accidentally – is one of the most expensive ways to borrow money in the world.

  • Banks charge effective APRs > 1,000% – making them worse than payday lenders

  • Banks have purposefully made the system obscenely complex.

  • Banks regularly re-order transactions in the background, increasing the fees you pay and stacking the deck against you

The U.S. always wants to be #1…

Unfortunately, overdrafts in the US are the most expensive form of short-term borrowing I have seen in the world.  Yes – it is more expensive to borrow here than in the UK, Russia or Mexico! Banks made $32 billion last year in overdraft fees alone.  And, in our survey, borrowing $100 for 7 days could cost up to $300 in fees!

How do fees work?

In the example of the gym membership, the bank has 2 choices: approve the transaction or decline the transaction.

If they approve the transaction, then you go overdraft and will be charged an overdraft fee. The average fee is about $35 per incident.  You can be charged multiple times a day.  One of the worst examples is Citizens Bank, which charges $37 per incident, up to a shocking 7 incidents per day. I’ll save you whipping out the calculator, that’s $259 in fees for a single day!

When your account is overdrawn, the balance is negative. You have to bring the balance positive (by putting money into the account), or else you will be charged an extended overdraft fee.

At Bank of America, you would be charged another $35 if the account is negative for 5 days. And remember: you have to cover both the amount you borrowed and the fee.  In the case of the gym membership – you would have to pay the $20 you borrowed and the $35 fee in 5 days, otherwise you are charged another $35!

If the bank decides to decline the transaction, you still get charged a fee.  This fee is called an NSF fee aka non-sufficient-funds fee.  And, guess what?  The fee is still a shocking $35 per incident.

So: you are charged $35 if it is approved or declined.

Doesn’t the bank also mess with how my transactions are posted?

In a normal world, transactions that take place at 8AM will be deducted from your checking account at 8AM.  Unfortunately, the rules are stacked against you.  Rather than posting the transactions when they actually happened, a lot of banks post transactions when they wish they would have happened.

Nearly 50% of banks use what is called “high to low processing.”  They take all of your transactions from the day, and deduct them from your account from highest amount to lowest amount (and they do this at the end of the day).  That means you will go overdraft sooner, and you will pay more fees.

Imagine you have a balance of $50.  You have 2 transactions: a morning trip to Starbucks for $5, and then dinner for $55.  If the transactions were posted in order, then you would only have one overdraft transaction: the dinner for $55.

If the transactions were posted from high to low (and not in the order they happen), then you would have 2 overdraft transactions!  At an average bank, that would increase the fee from $35 to $70!

And that is perfectly legal.

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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Balance Transfer

3 Traps of a Balance Transfer and How to Protect Yourself

View of businesspeople reaching across a table.

At 5 o’clock in the morning, you rouse yourself from bed, put on a t-shirt and old jeans, and head out to your garage. You pull all your unwanted collectables and last seasons’ clothing out of boxes and start laying them out on tables with price tags. An hour later – the local yard sale aficionados have descended upon your lawn to pilfer the things you don’t want and find some hidden treasures in your junk pile.

Balance transfers aren’t much different. In both cases, you’re trying to get rid of something you don’t want and someone else finds it valuable.

What is a balance transfer?

You may not like your credit card debt – in fact we hope you hate it – but banks love it. Why?  Debt makes the banks a lot of money. Every year, banks make billions of dollars on credit cards, so banks are constantly looking to get more of your debt.

A balance transfer is a way for them to steal your debt from the competition.

Imagine you work at Citibank.  You have a customer who has $5,000 of debt at Chase, and you want to convince that customer to move their debt from Chase to Citi.  What do you do?  You give her a great switching incentive (just like when your cable company offers you a great rate for the first 12 months of a contract).  So, you tell the customer that she can pay 0% for the next 18 months.  All that person needs to do is pay a one-time fee of 3%.

Almost all balance transfers have the following features:

  • A one-time fee:  these fees are usually between 3% – 4%.  They are charged up-front and added to the balance.

  • A promotional interest rate, usually 0%:  these promotional rates can last from as few as 6 to as many as 48 months.

How do banks make money?

So, the customer moves her debt from Chase to Citi.  Is the bank happy to be charging such a low interest rate?  Of course not!  Our Citibanker expects the customer to do one of the following:

  1. Miss a few payments. Before the CARD Act, a single missed payment (even by 1 day) meant the bank could increase the interest rate from 0% to a punitive 30% or higher.  That is no longer allowed.  But, if you go 60 days past due, the bank can increase your rate.

  2. Spend on the card.  If you start spending on the card, then your balance won’t go down.  Even better for the bank, interest will start accruing on the money you spend right away (unless you pay off the full balance, including the balance transfer)

  3. Still have a balance at the end of the promotional offer.  If you are given 0% for 18 months, banks are betting that you will still have a balance in month 19.  And if you have been spending on your card, it could be a big balance.  From month 19, the bank will start charging a nice high interest rate and your payment goes up.

Unfortunately, a lot of people fall into these traps.  That is why banks keep offering balance transfers. But, if you are savvy, you can easily avoid all of these traps.

  1. Set up an automatic debit as soon as you get the card and complete the balance transfer.  You will never be late.

  2. Once you get the card, put it in the freezer (hypothetically of course).  Never spend on it!

  3. Make sure you have a plan for the end of the balance transfer.  If you have 0% for 18 months, then make sure you shop around for the next balance transfer in month 18 so that you don’t have to pay the high go-to interest rate.

But the bank charges a fee.  Do I really save money?

promo-balancetransfer-halfSo many people write about their fear of the balance transfer fee.  Here is a general rule: if you can pay off your debt in 6 months or less, then the fee is not worth it.  If it will take longer than 6 months, than it is almost definitely worth it.  We will do the math for you on our Balance Transfer page.  I think you will be shocked by how much you can save.

Let’s break it down: $10,000 of debt at a 20% interest rate.  You decide to do an 18 month balance transfer with a 3% fee.  So, you pay a $300 fee up-front.  That fee may sound scary ($300 is a lot of money), but, during the next 18 months, you would have paid $2,758 of interest.  You will be savings $2,458 over 18 months.

Just think about it.  Rather than giving $2,458 to the bank, you can pay off your debt so much faster!

Feel up to the challenge? Let’s walk you through how to get a balance transfer!

Consider these balance transfer cards

Discover it® Balance Transfer

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on Discover Bank’s secure website

Rates & Fees

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Discover it® Balance Transfer

Annual fee
$0
Intro Purchase APR
0% for 6 months
Intro BT APR
0% for 18 months
Balance Transfer Fee
3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
Regular APR
13.99% - 24.99% Variable
Rewards Rate
5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com and more up to the quarterly maximum, each time you activate, 1% unlimited cash back on all other purchases - automatically.
Credit required
good-credit
Excellent/Good

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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Building Credit

What Makes a 700+ Credit Score?

whatisacreditscore

Three little numbers known as a credit score will determine a lot of your financial life. Credit scores help lenders assess your “risk factor” and unlike high-school girls, lenders aren’t interested in dealing with a risky bad boy. The lower your credit score, the more likely they think you are to default on a loan, make late payments or jet off to a foreign country and assume a new identity.

I first learned my credit score in a small, back-alley realtor office in New York City. My roommate and I were struggling to find a clean, safe, rodent-free apartment with an affordable price tag for two young twenty-somethings.

The realtor insisted I fork over $30 to run a credit report for my prospective landlord. After giving her my weekly food budget, I was informed I had a score in the 700s – which was apparently good enough for my landlord-to-be to deem me responsible.

At the time, I had no idea what the score meant or where it had come from.

The answer: through the diligent use of a credit card in order to establish credit history.

What goes into a credit score?

Fair Issac and Company (or FICO) – who owns the definition and scores credit – uses five different factors to assign you a credit score.

  • Payment history (35%): do you make payments on time? Missed payments can crush your credit score quickly

  • Amounts owed (30%): the more debt you have, the lower your score.  But even more important than the total amount you owe, is the amount you owe in relation to your total credit limit –which is called utilization.  If you max out every card you have, you will get punished

  • Length of credit history (15%): the longer you’ve had credit, the better

  • New credit (10%): this looks at how many new accounts you have opened, and many times you have applied for credit.

  • Types of credit used (10%): the more types of credit you have, the better.  So, someone who has successfully managed a car loan, a mortgage and a credit card would score better than someone who just managed a credit card successfully

What’s a good score?

The higher your score, the better the deals you can get from banks and lenders. FICO typically calculates scores between 300 and 850. You should strive for a 700+ credit score.

Why do I want a score above 700?

A score of 700 essentially puts you in the “prime” group and open up opportunities that aren’t available to other consumers including:

  • When you buy a home, you will get the best mortgage rates

  • When you buy a car, the 0% financing from manufacturers will be yours

  • When you apply for a credit card, all of the best bonus and introductory offers will be waiting for you

  • When you apply for auto insurance, you will be considered more responsible – and get better rates

  • When you apply for a job, you will easily pass screening that regularly includes credit scoring

People in Club Prime are diligent about paying on time, use less than 30% of their available credit (also called utilization) and have at least a three to five years of credit history. They also tend to have a good mix of credit instead of just credit cards or just student loans and don’t apply for lines of credit on a regular basis.

Why am I not “prime”?

There are two common reasons for why you may not have a credit score above 700.

  1. If you’ve shunned credit or are young and just entered the workforce then you don’t have enough history to have established a high credit score.
  2. If you’ve been using more than 30% of your utilization ratio, making late payments or missing your payments entirely, and applying for new forms of credit are all factors that can keep your credit score from moving into 700 range.

Check out 6 simple steps for improving your credit score.

Don’t be discouraged by a low score

If you’ve struggled with your financial situation, don’t be discouraged by a low credit score. They are fixable. It may not be easy at first, but taking simple, actionable steps you can begin rebuilding your score and eventually become a member of Club Prime.

Do you have a story to share about credit scores? Let us know in the comment section or email us at [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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