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Consumer Watchdog

Stop the madness: 6 ways to make overdraft pricing fair

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Dear Banks,

At MagnifyMoney, we were shocked to see that banks are charging effective APRs in excess of 1,000% for short-term loans.  We encourage you to consider our wish list below.

1. Stop charging to decline electronic transactions.  Declining an electronic transaction doesn’t cost you a thing.  Yet, you charge me $35 for this service.  If my gym sends a recurring electronic transaction, and you decline that transaction (electronically), then you shouldn’t be making $35.

2. Tell me my overdraft limit.  I know that you have assigned a credit limit for me, and it averages between $200 and $1,000.  (The CFPB told me that in their report, but I also worked at a bank and know that is the case).  Can you please tell me what my limit is?  That way I know my buffer and can plan accordingly.  Don’t tell me it is more complicated – because it isn’t.  When I don’t have information, I live in a constant state of stress. I know you don’t want to cause me unnecessary stress.

3. Stop charging fees and start charging interest.  When you approve an overdraft, you are giving me a loan.   Please charge me an interest rate on my loan, not a flat fee per incident.  Can you really justify charging me $35 for a $6 loan?  I understand personal loan fees: you have to cover the cost of acquisition and underwriting.  But I cannot understand the reason for this fee, other than excessive profiteering.

4. Charge a fair interest rate on my line of credit.  Nothing in life should be free.  Short-term borrowing is a convenience and a service, and you have every right to charge for it.  As a bank, you probably pay (on average) 2% to borrow your funds.  You need to make a good margin.  I believe 9.99% would be a good starting point, earning a healthy return.  If I have a bad credit history (or not much of one at all), you can charge more.  But be transparent about the pricing.

5. Stop the overdraft death spiral.  When you increase the price of something, fewer people use it.  In the case of a loan, the more you increase the price, the less it is used as a product of convenience – and the more it is used as a product of desperation.  You depend upon overdrafts for revenue. When the government gave us the right to opt out on Debit and ATM overdraft (about 40% of transactions), you increased the fees on everything else by about 40%.  Coincidence?

6. Don’t make me recommend a payday lender.  As a retail bank or a credit union, you should have the ability to put payday lenders out of business.  You already have the customers, so there is no acquisition cost.  You have a ton of data between my account history and my credit bureau.  You have a low cost of funds.   I have no doubt you can put them out of business, if you want to.

We understand you have to make a profit, but we’d like to see higher-levels of transparency (and general decency) for your customers.

Sincerely,
Nick and the MagnifyMoney Team

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.

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Balance Transfer

Fire Your Bank and Cut Your Interest by 90% with a Balance Transfer

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Credit card debt is nasty business. Every month you throw your hard-earned money at your debt and yet your balance never seems to go down all. Your stagnant balance is the result of a banker’s best friend: insanely high interest rates, which he happily applies to your credit card.

High-risk means high interest

The average interest rate on a credit card is often cited at 15%, but that number is misleading. Banks can average out a lower interest rate by awarding low-risk customers (people who pay their balance in full every month) a low interest rate – often below 15%. Simultaneously, they spike the interest rate on higher-risk customers who borrow money using a credit card. Those rates are often higher than 15% and can even tip the scale towards 30%.

What does that mean in real terms?

  • You have $10,000 of credit card debt at a 20% interest rate.

  • You will have a minimum payment of approximately $276

  • Over the course of a year, you will make more than $3,000 of payments

  • $1,893 of that is interest

  • That equals an average $158 per month of interest to the bank

That high interest rate means that your hard-earned money is going into the pockets of bankers, rather than paying down your debt.

It’s no wonder that in our recent survey, 78.8% of Americans with debt believe that their interest rate is too high.

How to pay off your credit card debt

To get serious about paying down your debt, you need to keep two things in mind:

1.  Can you pay more each month towards your debt?

2.  Can you reduce the interest rate on your debt?

We know that brown-bagging lunch and cutting the daily latte habit gives you a nominal sum to throw at your debt, but the most effective way to pay down debt faster is reduce your interest rate.

(All while living below your means of course.)

In the example above, you would be spending nearly $2,000 in the next 12 months on interest.  If you could cut that rate in half, you would take years off the time to pay off that debt.

Shopping for lower interest rates doesn’t show lack of character

Just imagine you are the CFO (Finance Director) of a business.  You borrowed money to fund expansion plans.  You are currently paying 20% on that debt.  Banks are offering interest rates as low as 4%.  But you don’t do the work to get the 4% interest loan, because you think it shows a lack of character. You borrowed the money, so you need to pay it off. It is highly likely that you would have a short career as a Finance Director. You would be fired. And your replacement would immediately re-finance the debt at 4%. The money saved could then be used to pay down the debt more quickly or re-invest in the business.

You should run your family financial affairs no differently. You should be looking to keep your interest expense as low as possible. You can then use the money you save to pay down your debt faster.

In most cases, the banks aren’t rewarding you for being a loyal customer. They aren’t operating with buy-nine-get-the-tenth-one-free coupons! Instead, the longer you have had your credit card, the more likely the rate is even higher than 30%.

Before the CARD Act was implemented in 2010, banks used to participate in a fiendish little trick called repricing. With little disclosure, banks could rapidly, dramatically and legally increase your interest rates. And they did it often

Just because you accrued debt on a card with Bank A doesn’t mean you should subject yourself to their abusive interest rates.

Time to start looking at a balance transfer

At MagnifyMoney, we love balance transfers. They are the single best way to reduce the interest expense on your credit card. If used properly — and you must follow the rules– you can slash your interest expense by 90% or more.

And when we did a survey, 89.1% of Americans who did a balance transfer in the past would do one again.

Not sure what a balance transfer is or how to get one? Don’t worry, we’ll take you by the hand and explain it all.

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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.

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Earning Interest

Are Bank Branches the Next Blockbuster?

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First, I must confess that I love bank branches and always have.  As a child, I used to enjoy going with my mom to the bank.  The people were friendly, the lollipops were tasty and I had a real sense of accomplishment when I could deposit a roll of coins.  My affinity for bank branches makes this article particularly difficult for me to write, but it contains good news for all of you out there who would rather do anything else other than go to a bank branch.

You can finally switch to internet-only banks and put hundreds of dollars back into your pocket.  Real choices finally exist.  In fact, after doing the research on the best bank accounts for MagnifyMoney, I switched to Ally (both checking and savings account).  And I doubt I will ever go back to branches.  (Note: I have not been paid by Ally, and they are not a sponsor or investor in this site).

How do traditional banks make money?

I used to work for large banks (like Citibank and Barclays).  Retail banks branches are expensive to run, but banks banks make a lot of money with their brick-and-mortar locations.  So, how do banks make money?

1.  You give them interest-free loans.  If you keep a lot of money in your checking and/or savings account (usually $2,000 is enough), the bank makes money by paying you virtually nothing, and then lending that money in the form of loans that make a lot more money.  When I worked at a bank, I loved “sticky, low-cost deposits” to fund our business. Every $1,000 you keep at the bank is about $20 of profit to a retail bank.  $20,000 savings accounts were the best.  We would make at least $400 a year.

2.  You pay them lots of fees.  If you don’t have a lot of money, then banks will make their money on fees.  Banks make the most money on overdraft fees.  Almost 70% of their revenue comes from overdrafts – which is the most expensive way to borrow money short-term that I have ever seen.  In addition, banks make a good chunk of money with monthly maintenance fees (those pesky charges if your balance falls below a minimum) or ATM fees (you use someone else’s ATMs).

And, although fees vary by bank – the differences are not dramatic.  The monthly fee at Citibank is $10 per month.  At Bank of America it is $12 per month.  You can save a little money at Citi, but the difference is marginal.  That is why building branches made sense for banks.  The product offering did not differ much – so people would choose banks based upon the proximity of the branch.

Credit unions are usually a little bit better than banks at both fees and interest rates.  Why? Because they don’t have shareholders.  Their customers also own the credit union, so the goal is to pay higher deposit interest rates and charge lower fees.  They do a decent job of lowering fees — credit unions have many more free accounts and much lower monthly and overdraft fees.  But while they can be dramatically better on some fees, they still tend to have hefty overdraft fees ($25 average instead of $35) and low interest rates on savings account (PenFed pays 0.05% compared to 0.01% at Bank of America).

Enter internet-only banks….

How do internet banks create a revolution in banking?

Amazon is able to charge less than Barnes and Noble.  Why?  Because they don’t have to pay for all of those bookstores and people.  Internet banking is no different.  By removing branches, you are removing the single biggest cost of banking.

So what can internet banks do with all the money they save?  They can slash the cost of routine, everyday banking for you and save you the cost of gas.

How does that add up for you?

  • Dramatically higher interest rates on your savings

The Bank of America Savings Account pays only 0.01% interest rate. Compare that to the best online savings accounts.  Right now Ally is paying 0.87% on savings, with no minimum.  So, you could earn $50 at Bank of America, or $435 at Ally on that $50,000 deposit!

  • Dramatically lower fees on your checking account

Ally, Charles Schwab and Bank of the Internet Rewards Checking (just to name a few) have no monthly fee, no minimum deposit and no requirement to keep the account free.  A real free account.

  • Actual overdraft protection

Online banks are revolutionizing overdraft charges.  Ally, Schwab and Bank of the Internet let you link your savings/money market account to your checking account.  If you make a mistake, they will transfer funds from your savings to your checking account – FOR NO CHARGE!

If you actually need to borrow money, Capital One 360 has created a line of credit that is linked to your internet checking account.  There is no overdraft fee, and interest is charged only for the days that you use the line of credit.  This is an incredible deal.

  • Reimburse you for ATM fees

Not only do internet banks not charge you for using other bank ATMs, but they also reimburse you for any charge that you may receive from the other bank.  Ally and Schwab have no limit on the reimbursement.  You can use any bank’s ATM for free!  With my Ally checking account, I happily go to the closest ATM when I need cash – and I don’t worry about fees.

  • Deposit checks with your mobile phone

MagnifyMoney did a survey of Americans, and the #1 reason people go to a bank branch is to deposit a check.  Now you can deposit a check by taking a picture with your mobile phone.  Ally Bank allows you to deposit checks with a value up to $10,000.  Thanks to the power of your mobile phone camera, you really don’t need a bank branch.

In an ironic twist: banks have made this revolution themselves. They have gone out of their way to push us into digital channels.  They want us to give up paper statements, deposit checks with our mobile and use the ATM.  Why?  Because they want marginal cost improvements.  Fewer people in the branches.  More part-time employees in the branch. But banks keep the savings of our digital banking.  They want us to make the digital switch so that they can make more money.  But  now we can make more money by switching to internet banks.

But are they safe?

Yes, they are safe.  All of these banks are FDIC Insured.  That means you have the same protections and rights as any other bank (up to $250,000).

In addition, a lot of these banks are actually being created by well-known financial organizations.  Ally has been created out of the shell of the old GMAC.  Charles Schwab is already well-known brand in its own right.  And some of the new entrants have been rapidly acquired by banks that know the world is changing.  Simple, an internet-only bank, was just acquired by BBVA – one of the largest banks in the world targeting Latin America.

Is the future finally here?

People are remarkably loyal to their bricks and mortar bank branches and banks know that. So, they pay 0.01% on deposits, charge $12 per month and $35 if you go overdraft.

But, for the first time, real competition is coming.  At MagnifyMoney we are thrilled to see the competition, and the money that it could save you. You can just see that these businesses have been designed to delight and satisfy customers. When my Ally Bank CD expired, they sent me a letter and gave me a loyalty bonus.  My rate would be 0.15% higher than the highest advertised rate – to thank me for being a customer!  Most traditional banks do it the other way.  They give big teaser introductory offers to get you to switch, and then it only gets worse over time.

But now with Ally, Schwab, Bank of the Internet, Simple and others – we will have a big incentive to switch – because the savings will go into our pocket and not the banks’.

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.

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