3 Types of Bank Fees that are Stealing your Savings
Banks are important financial resources, but to unsuspecting consumers banks can be armed and dangerous. Their weapons of choice—hidden fees. As recent reports have shown, big banks are holding a “stick up” and want to steal your savings. Thankfully, Clearpoint is here to explain the different types of bank fees and to show you how to avoid paying them.
You need protection from overdraft protection
You may be enrolled in overdraft protection, the program supposedly designed to save you money and bail you out if you ever run into a tight financial crunch and accidentally withdraw too much money. A recent report from the Consumer Financial Protection Bureau (CFPB) shows that banks are taking advantage.
The FDIC put a law into place in 2010 that gave consumers the option to enroll in overdraft protection (which allows banks to pay on your behalf with money you don’t currently have) or simply have their cards denied when they make purchases that cost more than they have. Having your card denied might be embarrassing, and overdraft protection has been marketed as a way to protect consumers from this embarrassment.
But today, overdraft protection is a moneymaking scheme for banks and one of the most profitable types of bank fees. Here’s what the CFPB study revealed:
- For large banks, 61% of their checking account fee revenue came from overdraft protection programs.
- The average annual overdraft charge is $225 (as low as $147 and as high as $298, depending on the bank).
- Banks change the order of consumer purchases so that larger purchases are processed first, leading to more fees.
Our recommendation: Budget effectively so you won’t need overdraft protection and won’t get caught up in this web of bank fees. Carry extra cash just in case you get caught in a bind and be sure to establish an emergency fund! By the way, heavy overdrafters who decide to opt out of overdraft protection can save an estimated $900 per year. While it might be more embarrassing, it’s cheaper to have a card declined than to have the payment go through and get charged a hefty fee.
Learn more in this video:
Checking Account Fees
A checking account is supposed to be the simplest feature of a bank, right? Well then why do banks charge fees for such a simple service? Here’s a look at the types of bank fees for checking accounts at three top banks and how you can avoid the fees altogether:
Bank of America: A $12 monthly maintenance fee, $25 required to open the account.
Avoid it: Have a qualifying direct deposit of $250 each statement cycle, maintain a balance of $1500 or more, or use a paperless statement AND sign up for self-service (no teller).
Wells Fargo: A $12 monthly service fee ($10 if you go paperless) and an extra $5 fee to link a savings account (you may not even make that much in interest).
Avoid it: For checking—make 10 debit purchases a month, have $750 in qualifying direct deposits each cycle, maintain a $2,000 or higher balance, or have a linked Wells Fargo credit card. For savings—choose to enroll in one of several other “savings” programs or maintain a $300 or higher balance.
Internet banks: Ally, Capital One 360, and many other online banks are trying to make it easier for consumers to avoid various types of bank fees. Of course, you’ll have to weigh the pros and cons of not having access to a physical bank, but it may be worth it. Apps that allow you to deposit checks and reimbursement programs for ATM fees nationwide are two benefits to look out for if you choose to use an internet bank.
Retirement Account Fees
If you have decided to save for retirement, you know that every penny counts. When you are dealing with compound interest the more money you can contribute and the earlier you can start make a big difference. So, don’t let bank fees hold back your account. Here are two types of bank fees associated with retirement accounts and how to minimize them:
Commission or “load” fees: These are fees, or “loads,” that you pay to the adviser handling your investment(s). Having an adviser is good for people with limited investment knowledge, but in today’s world it’s fairly easy to do your own research. If you’re up for the challenge, research investment options online and choose “no load” accounts.
Account fees: Banks and investment groups charge an average of $20 annually just to operate a simple retirement account such as a 401(k) or IRA. In most cases, you can avoid this bank fee by going paperless. Long story short: they don’t send you mail and you manage your portfolios online. You still have access to customer service.
Another tip: Mutual funds have varying expense ratios, which compare the fund’s assets to its annual expenses. The lower the expense ratio, the less you will pay in fees. A lower expense ratio doesn’t necessarily mean a smarter investment, though.
Stay Educated about the Types of Bank Fees
We have pointed out the common types of bank fees and how you can avoid them. But, things are always changing. You need to stay aware of the terms and conditions for your bank and credit cards. You also need to pay off debt so that you can have more money for an emergency fund and can maintain high balances in your checking account. For more personalized help, talk to a counselor today.
Does your bank charge fees? Let us know in the comments below.
What this site (and many other people) calls overdraft protection isn’t overdraft protection.
Overdraft protection is either a separate account or a line of credit set up to offset the fees that incur when you overdraft your account.
This “overdraft protection” that is mentioned on this site is simply a feature on your debit card that allows you to overdraft your account for ATM withdrawals and non-recurring debit card purchases.
Only the former is overdraft protection and, yes, you need that. The latter? Good for some people, bad for others. Really depends on the individual.
ARB–Angry Retail Banker
You make a great point about these differences. It’s a little tricky to navigate the language and all the different programs and features that banks present to consumers, so thank you for helping clarify!
It looks like even the “feature on your debit card that allows you to overdraft your account” is typically referred to as overdraft protection, though, even according to the CFPB: http://www.consumerfinance.gov/blog/category/overdrafts/
We’ll stick with this language for now, but again thank you for pointing out its shortcomings, and those are definitely good points to keep in mind.
The banks won’t tell you that you need to be behind in payments to get the investor to work with you on a modification, but in most cases it is true. I spoke to a rep at a major bank this week and they indicated that being more than 60 days behind is a prerequisite for most servicers to move forward with a modification request. They say it makes it very difficult for them to communicate with borrowers because they are not allowed to tell them to fall behind and then reapply.
That is pretty scary stuff, especially because missing mortgage payments can do significant damage to a credit score. Thankfully, many banks and lenders will help you with a modification if you are experiencing or anticipating an increase in mortgage payments, loss of income, or other hardship. You might also qualify for a MHA program (check out our post on HAMP)
It may depend on the lender, but we recommend that you communicate as early as possible. You don’t want to miss a payment if doing so is avoidable.