Banks have many ways to make extra money from their customers. Below you’ll find the 10 most common bank rip-offs, along with actions you can take to protect yourself. (We compiled this list from The Wall Street Journal and Listverse.)
1. Fees for lines of credit
Even if you don’t use them, banks can charge you for lines of credit. U.S. Bank allows you to set up lines of credit to help with overdraft protection. If you use it, the APR is 21.9%. At TD Bank, a line of credit for overdraft protection on your checking account has an annual fee of $25 and a $10 per day charge. A home equity line of credit (HELOC) at TD Bank costs $50 annually plus whatever the rate is.
How to Protect Yourself: Not all banks will charge you if you are not using the line of credit. I have a line of credit with Bank of America for which I’m charged 3% plus LIBOR on what I use, not the full line. If you are considering a line of credit, make sure you will pay only on money borrowed.
2. Low interest rates on savings
Most savings accounts have pitiful interest rates. Inflation eats away your money if it’s sitting in an account earning 0.11%.
The bank doesn’t care. It can borrow money at the Federal Funds Rate (0.25%). And then turn around and “invest” that money in U.S. Treasury bonds paying 3%. Easy money for them. They don’t need yours.
How to Protect Yourself: Keep only as much money in your bank as you need for routine transactions. Put the bulk of your cash in either a brokerage account or, if you have decided to open an Income for Life policy, in that.
[An Income for Life policy is an account where you can earn up to 5% per year. We created a special report that talks all about it. Click here for details.
Call your bank or go online and link your checking and/or savings account(s) to your brokerage account. Set up automatic transfers so that you don’t keep too high a balance in checking or savings.
3. Special offers and aggressive sales techniques
To maximize profits, banks sell a variety of expensive financial products. These products include credit cards and loans as well as managed money services. If you keep a substantial balance in your accounts (for business or personal reasons), you will be regularly pitched on the advantages of using their services.
You may want to use such services from time to time, but be cautious. More often than not, you will discover that there are substantial costs associated with them, some of which may not be apparent from listening to the sales pitch or doing a quick read of the sales materials.
One common trick is to offer a low introductory rate on a credit card that jumps to 18% or 20% in a matter of months. Another ruse is offering a loan with a rate that is initially discounted but then climbs without notice.
How to Protect Yourself: Be skeptical. Assume that “special offers” are especially good for the bank and not so good for you. Ask about costs in very direct ways. Ask questions like, “Is this the full and complete cost or are there others?” or, “Are there any other terms I should be aware of?”
If you are introduced to the bank’s investment advisor, think of him as a salesman, not as an expert that knows more than you do about what you should do with your money. Ask questions, the dumber the better. Then follow up on those questions by asking for the answers in writing.
4. “Talk-to-a-human” fees
Some banks charge you to use tellers. Bank of America, for example, has an online-only account. If you use a teller, you pay an $8.95 per month transaction fee. If you have PNC’s “Virtual Wallet” account, you pay $7 per month to use a teller.
Other banks charge you for talking to a representative on the phone. At PNC, calling a customer service rep to make transactions instead of doing them online costs $2-3. At Union Bank, it costs $1.50 per month to be at the front of the telephone queue.
These fees are not scams. Banks have a right to charge them. Still, they allow the banks to make money from their customers on top of the big money they make from the saving/lending spread discussed above.
How to Protect Yourself: Ask your bank for an account that does not have a fee to talk to someone in person or on the phone. If they do not have one, look for an online bank at Bankrate. Alternatively, you could try a credit union. You can look for one in your area here. If there is not one in your area, you may be able to find a good one online.
5. Overdraft fees
Banks often charge a penalty when you bounce a check or withdraw more money than you have in your account. According to a recent study from Moeb’s Services, an economic services firm, the average overdraft fee is $30. Bank of America charges $35. TD Bank, $36.
Banks can also charge an additional fee as long as the account remains in arrears. And they often do charge this extra fee, sometimes as much as $5 or $10, on a daily basis.
Banks will tell you that it costs them money to deal with overdrafts, and it surely does. But I don’t believe for a moment that it costs them, on average, $30 per transaction. My guess is that they see overdraft penalties as a profit center in and of itself.
How to Protect Yourself: Set up overdraft protection by asking your bank to link your checking account to a savings account or credit card. If you overdraw your checking account, money will pull from your savings account or charge to your credit card. The most common fee you’ll pay here is a transfer fee of around $5. Not optimal, but far better than $30-plus for an overdraft.
Another solution is to always keep “extra” cash in your checking account as a buffer.
6. Credit card fees
Credit card issuers charge cash advance fees, statement copy fees, and several other fees.
Some banks charge an annual fee for the mere “privilege” of using their card. Normal fees range from $35-$95. The American Express platinum card will set you back $1,250 per year. And then there are the elite cards… such as the invitation-only American Express black card: $5,000 up front and $2,500 per year.
There are some advantages to having an elite card. But you should determine their value and make sure you can make use of them before paying for the card. I have an AMEX black card, and I’ve been trying to make it pay for about 10 years.
I get lots of additional airline miles when I buy things with the card. I get upgrades and discounts at hotels. I get various little benefits here and there. And I have access to a concierge service that is friendly but seldom gives me real deals.
Bottom line: It’s not paying for itself. The only reason I still have it is because it gives me an ego-boost to use it. I’m going to see a shrink about that. The irony is I’d probably pay her with my black card for my issues with the damn thing.
How to Protect Yourself: Choose a credit card that does not have an annual fee. Check Bankrate and Consumer Reports for reviews of the best cards.
Note: In May 2009, Congress passed the Credit Card Accountability, Responsibility, and Disclosure Act (aka the Credit CARD Act). The goal was to reduce unfair and confusing industry tactics by providing “basic standards of fairness, transparency, and accountability.” And it worked. It not only made the cost of credit cards clearer to consumers, it helped reduce late fees, stop credit card companies from jacking up interest rates, and virtually eliminated over-limit fees.
7. Currency conversion fees
Want to swap dollars for euros… or any other currency? You have to pay the bank a fee. And issuing banks usually charge fees for making foreign purchases with their credit cards.
According to Bankrate, Visa and MasterCard have a standard 1% fee for foreign purchases. Then the banks that issue those cards add another fee onto that. Fees can reach up to 4%, according to Credit.com. Wells Fargo, for instance, charges a 3% foreign currency conversion fee on credit card purchases.
If you use your debit card, the fee can be less. HSBC, for example, charges 1% on foreign debit transactions.
How to Protect Yourself: Call your credit card company and bank and ask if there are fees on foreign transactions. Ask if they can waive them. When converting currency overseas, go to a bank. It’s cheaper than the currency exchange counter at a hotel or the airport.
You can also use ATMs, which will probably give you the best rate of exchange. But then you will get hit with out-of-network ATM fees and conversion fees. And the owner of the foreign ATM may charge a fee.
Many banks charge higher fees for international ATM withdrawals—either a flat rate (typically $1-6) or a set percentage of your total withdrawal (usually 1-3%). Check with your bank before each trip abroad, as these fees can change often and without warning. And because these small fees can add up quickly, consider withdrawing larger amounts than you normally might (for fewer transactions at the ATM).
Another alternative is traveler’s checks. These work like cash. You can replace them at current exchange rates if you lose them. And, in many places, you don’t have to pay a fee to use them. Plus, they don’t expire… and are available in many different currencies.
8. Checking account fees
Most banks did away with checking account fees a long time ago. But after the 2009 meltdown, some have gone back to charging them. Bank of America, for example, charges $12 per month. PNC Bank charges $7.
Some banks also have minimum balance requirements. TD Bank, for example, makes you keep a $100 balance in your checking account to avoid a monthly fee. Bank of America requires a $1,500 balance.
And many banks now charge a fee for monthly paper statements.
How to Protect Yourself: Make sure your bank doesn’t charge a checking account fee. Watch out for minimum balance requirements. If there is a fee, ask about having it waived.
Some brokerage firms, like Fidelity Investments, offer a Cash Management account that acts like a checking account with no fees. They have free checking and free online bill paying. They even reimburse ATM fees worldwide.
Ally Bank also has free checking with no minimum balance and no maintenance fees.
To avoid paper statement fees, have your statements delivered digitally. You’ll have an online archive that you can always go back to. And if you ever need a copy of a particular statement, you can simply print it out.
9. ATM fees
Need cash but you’re not near a local branch of your bank? You can use another bank’s ATM. But watch out. Fees range from $2-$5, sometimes more. And your bank may charge an additional fee.
How to Protect Yourself: These fees shouldn’t affect you much if you’re diligent.
You can use a credit or debit card instead of cash. If you use an ATM that is in your debit card’s network, you may not be hit with a fee. And if you have a debit card issued from an online bank, the online bank may reimburse ATM charges to the tune of $15 (or so) per month. USAA, for example, does this.
If you need to transfer cash to someone (perhaps when splitting a check with friends), use a service like ClearXchange (a joint venture between Bank of America, J.P. Morgan Chase, and Wells Fargo), PayPal, or one of the available smart phone apps.
Or just carry cash when you know you’ll need it.
10. Account closeout fees
Banks can charge a fee if you close your account within a given period of time, say, 90 days. Some require six months’ notice. Fees range from $5-$25.
How to Protect Yourself: If you’re thinking of closing an account, ask your bank if they charge a fee to do it. If you have two accounts at the bank, you may be able to transfer all of your money to one of them and avoid the fee.
Six Tips for Keeping Your Bank Accounts Safe
1. Choose a PIN that’s hard to guess.
“X” here – Forget “paperless”; be responsible and keep only the recent statements you might need. I don’t bank online, or pay other bills online. If the Gov’t and other org’s have been hacked, (they have) realize that their security measures are better than ours, but they were still victimized, and your vitals are at risk as well when this happens. Go to your local branch to pay your credit card, or make other transactions!
2. Shred or destroy your old statements. Better yet, go paperless.
3. When accessing your account online, do so only from your home computer. You never know how secure a public or free wireless network is.
4. Use a complex password to access your online account. Don’t worry about forgetting it. A program like LastPass (free) or RoboForm (paid) will remember it for you.
5. Don’t respond directly to emails that look like they are coming from your bank.
6. If someone from your bank calls, tell them you’ll call them right back. Then call them at the number listed on their website or on the back of your card.
Like brokerages and insurance companies, banks provide useful services. But also like their financial cousins, they make a profit by charging fees and commissions that are sometimes unreasonable and often unclear.
I have at least a dozen accounts with my primary bank and several accounts with smaller banks. At my primary bank, I get responsive, personal service from a small group of people, including the branch manager. They want my business so they work hard to keep me happy.
But that doesn’t mean I can accept whatever it is that they offer me in terms of rates, conditions, and terms. To ensure that I’m well treated I have to remain vigilant. I have to ask questions, read the fine print, and challenge them when I don’t like what I discover.
Your leverage with your bank will depend partly on how big the bank is (larger banks tend to be less flexible in some ways) and how valuable a customer you are. It may not be the branch manager, but you should have someone at your disposal who will work hard to keep you happy.
Mark Morgan Ford
Editor PBL’s Creating Wealth