It would be great if banks existed solely for the purpose of storing our money and helping us out with loans, investments, or other financial instruments when we need them. Unfortunately, banks are out to turn a profit – often at the expense of the very people they are supposed to be serving.
Here are the five most common ways that banks gamble with your money – and how to keep yourself from getting shafted.
1. Junk fees on loans. Whenever you take out a mortgage, refinance your existing mortgage, or apply for a loan for a big-ticket item, the bank will give you a written Good Faith Estimate that documents all of the charges associated with the loan. In addition to the interest rate and repayment terms, the GFE will list all of the other fees that the bank will be charging you. Some of these fees are perfectly legitimate, such as closing fees, legal fees, and recording fees.
However, there are a great many other fees that are often listed in GFEs that serve only to pad the bank’s bottom line. These are often referred to as “junk fees.” That’s because they really don’t have a purpose, even though they may have official-sounding names such as loan review fees, administrative fees, underwriting fees, and warehousing fees.
How you can protect yourself: Before signing a loan agreement, ask about any suspicious fees. If the bank cannot give you a satisfactory answer, ask to have the fees removed or reduced.
2. Loan origination fees. These fees are often the largest ones found on a loan document. Simply put, loan origination fees (or “points”) are what the bank charges you for arranging the loan, mortgage, or refinancing arrangement.
The industry standard for a loan origination fee is a maximum of 1% of the loan amount. So if you are wanting a $350,000 mortgage, your loan origination fee should be no more than $3,500. However, some banks try to charge high loan origination fees in order to boost their revenues. Sometimes they’ll set loan origination fees of 1.5%, 2%, or even higher.
How you can protect yourself: The loan origination fee is negotiable, so don’t be afraid to dicker with the bank representative about reducing it. However, if you see a figure higher than 1%, demand that it be decreased. If the bank refuses, don’t sign the loan agreement. Take your business elsewhere. Unless you have terrible credit, you can get a better rate from another lender.
3. Overdraft fees. This is another way that banks can pad their coffers at your expense. If you have a checking account and you bounce a check or use your debit card when you don’t have enough money in your account to cover the transaction, then the bank will charge you a hefty “overdraft fee.”
Here’s why these are profitable for banks. If you pay five monthly bills and the payments are processed before you get your paycheck, then you’ll be charged five overdraft fees by the bank. And the best part? If you try to overdraft your account at an ATM or a point of purchase, the bank will not refuse the transaction because you have insufficient funds. Instead, the transaction will go through and the bank will hit you with the penalty fee.
How you can protect yourself: Obviously, the best way is to avoid going below zero in your checking account balance (some banks will issue email or text alerts if the funds in your account are dwindling). If you do trigger an overdraft fee, sometimes you can call the bank and ask to have it removed – though this won’t work for repeated overdrafts. Some banks offer “overdraft protection,” which may cost you a fee but might be cheaper than overdraft charges.
4. Dropping account interest rates. It’s not uncommon for people to sign up for a bank account when they hear about a great interest rate. After all, what’s better than earning money on your account just for allowing the bank to hold on to your money?
Trouble is, banks frequently decrease these attractive interest rates with no notice and without notifying the customers. There’s even an industry term for this activity known as “pump and dump.” Banks count on the fact that customers won’t notice (or care) that they’re not earning as much in interest as they did when they first opened the account.
How you can protect yourself: Every month when you get your bank statement, look to see what the interest rate is on your account. If it’s suddenly lower than the previous month, call the bank and tell the representative to raise it back to the original rate. If the bank refuses, then take your money to another bank with a better rate.
5. Credit cards. You may have felt special when your bank offered you a credit card with a low annual percentage rate or with some cool perks. But the credit card offer may not be as fabulous if you have to pay an annual fee, or late payment fees, or fees to redeem your rewards points.
But the biggest way banks make money off of credit cards is when they raise the APRs after a late or missed payment. Then your monthly payment could jump substantially, and the amount in interest that you’ll pay over time will balloon as well.
How you can protect yourself: Don’t sign up for a credit card unless it suits your needs – it is not a “gift” from the bank to you. The bank is simply trying to get you to spend more money and pay more fees. If you do get dinged with a fee, call the bank and ask to have it removed. The same goes for an increase in your annual percentage rate. And if you don’t like the way the bank is treating you, pay off the card (perhaps using balance transfers from other credit cards) and close the account.
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Chris Martin is a freelance writer about topics ranging from cheap car insurance to consumer finance to home improvement.