Banking / Loans

Starting in 2010, banks had to get your permission to charge overdraft fees. These fees, which you pay when you try to spend more money than you have in your checking account, were previously an automatic thing -- they came with every checking account whether you wanted them or not. After the law took effect, consumers had to opt-in to overdraft protection programs and the accompanying fees.

You might expect that overdraft fees have dropped since then, but banks still collect substantial fees, and revenue from fees is not far from pre-2010 levels. A recent study from The Consumer Financial Protection Bureau (CFPB), an agency charged with protecting consumers, shows some staggering numbers. Ultimately, it looks like a small portion of the population pays the bulk of these fees, and they could save a lot of money if they just opted-out of overdraft protection.

For example, 27.8% of accounts studied had 10 or more NSF or overdraft charges applied, and only 27% had one or more of these charges -- so most consumers are not paying these fees. However, those "heavy overdrafters" who've opted-in to overdraft protection programs pay dearly (but they don't have to): according to a CFPB press release,

"The CFPB study looked at previous heavy overdrafters who declined to opt in when the new federal requirements were implemented in 2010. It found that by opting out these accountholders reduced their overdraft and non-sufficient fund fees, on average, by more than $450 in the second half of 2010.."

You may have noticed the part about "the second half of 2010," which means that these people could potentially save $900 per year if they opt out.

So, if you're part of that heavy overdrafter group, stop paying overdraft fees and save yourself some money. Banks sell the service as a way to make sure you can spend when you want to, but it's hard to imagine how anybody can come out ahead when they spend $900 per year on overdraft fees. That $900 you save might make it possible for you to keep your account balance above zero.

In the olden days, lenders and merchants decided whether or not to lend you money (or extend credit) based on your character. The world was a smaller place, and your local shopkeeper knew who you were and whether or not you were likely to pay what you owe. Now, most lending decisions are based on the results of a computer program, which only looks at a few factors in your credit history.

But things may be coming full circle. Several companies are figuring out how to make lending decisions by looking at Facebook friends and LinkedIn connections. These "social credit scores" probably won't take the place of traditional credit scores, but they'll come in handy in certain situations. For example, if you don't have much of a credit history for lenders to examine, is there any other way for them to determine whether or not you're likely to repay? Perhaps your connections will say something about you (whether or not the output is accurate or legal remains to be seen).

If you're counting on social connections for winning a loan, pay attention to who you're friends with. Your connections might help or hurt you (if somebody fails to make payments, they could hurt the credibility of all their connections). However, it's probably not worth worrying about if you already have good credit.

Wedding season is in full swing, and that means that some people are joining their finances. Getting married doesn't necessarily mean you have to combine everything, but some expenses and accounts will inevitably end up as "joint" things, and each person's financial situation can play a big part in a marriage.

If you plan to spend your life with somebody, ideally you have no problem discussing difficult topics. Money is one of those topics, but a recent poll conducted by the National Foundation for Credit Counseling (NFCC) shows that most people find this topic extremely challenging. 7% said they'd avoid discussing finances with a fiancé, and another 5% said the discussion would lead them to call off the wedding.

Fortunately, there are ways to reduce the likelihood of problems. NFCC shares a few tips that can help you get through the conversation with your relationship intact. If you can talk about money with your soon-to-be spouse, you can make it through almost anything.

Further reading:

• What is Rent to Own?

Using a certificate of deposit (CD) used to be a sure way to higher earnings. By promising to lock your funds up with the bank, you'd get a higher return on your cash.

These days, savers can hardly earn anything, and they don't do much better by using CDs -- unless they're willing to do some homework. Bankrate's most recent survey of interest rates shows that a 6 month CD doesn't pay much more than a money market account (0.15% vs 0.11% APY). But things aren't quite that bad if you shop around. Online banks such as Capital One 360 pay 0.4% for 6 month CDs, and you can even do better if you make a large deposit or if you qualify at certain institutions.

If you're disappointed with returns on CDs, make sure you're looking at online banks in addition to brick-and-mortar banks and credit unions. It's the best way to earn more interest without going to extremely long term CDs.

Further reading:

• CD Investment Strategies

Banks collected $32 billion in overdraft fees, according to a new study from the economic research firm Moebs Services. That's all as a result of consumers spending a little bit more than they have in their checking accounts.

Anthony Fontana crunched the numbers, and he estimates that that's about $400 on average per working-age consumer in the United States. Of course, nobody is exactly average; some of us paid a lot more, and some of us paid less (or nothing at all). In other words, some people are paying a lot more than $400 per year, and there's no way that that's working out well for them. Typically those charges are paid by the people who least able to afford them.

What can you do if you've been contributing to this $32 billion fund? Pay a little less, or avoid the fees altogether. The study shows that credit unions charge a bit less than large banks, presumably because they have less overhead. Another way to reduce your fees is to use an overdraft line of credit -- which allows you to pay interest instead of a hefty per-transaction fee.

Eliminating fees is probably your best bet. The only way your bank can charge those fees is if you allow them to. You had to opt-in to whatever overdraft protection you're paying for, and you can always opt out. If you don't need the coverage (how could it benefit you to pay over $400 per year?), contact your bank and find out what to do to turn off "overdraft protection."

It shouldn't be surprising, but it is: auto loans are now available for terms of up to 97 months. Because it's hard to divide into numbers that large, I'll just tell you -- it's a little over 8 years. That means that you can really stretch out your auto loan (possibly for longer than you'll keep a vehicle) and minimize your payments.

Unfortunately, these loans will probably get used to buy autos that a borrower could not otherwise afford. They'll be able to keep monthly payments down, and that means that buyers can move upstream and add more expensive options. It sounds a little bit like interest-only mortgages before the financial crisis.

Kevin Mercadante, writing for CashMoneyLife.com explains why 97 month loans can lead to trouble. I suppose that they could make sense for a cash-strapped borrower who desperately needs a car to get to work and earn an income, but even then these loans are risky and expensive unless you pay them off early. And of course the majority of people who use long term auto loans aren't going to fall into that category.

If you're buying an auto this summer, keep your loan to 5 years or less. You won't be able to spend as much, but you'll steer clear of trouble down the road.

It's not a bad idea to leave (and maybe forget about) a little bit of cash sitting in the bank. That money can grow, and it will be available if something comes up.

Unfortunately, banks often "freeze" inactive accounts, and you might not have access to your emergency cash. Some accounts are frozen after as little as 6 to 12 months of inactivity, and un-freezing them is not always easy. In some cases you'll have to mail documentation to the bank (which proves that you exist and confirms your address), and that process may take a few days.

Why do banks freeze these accounts? If they don't see any transactions in an account, they eventually consider it "abandoned." For all they know, you've forgotten about the account, or you may have passed away. Six months is a pretty short time period, but at some point they need to call your account dormant (and eventually turn your assets over to the state).

Preventing accounts from getting frozen is much easier than un-freezing them when you want the money. Ken Tumin at DepositAccounts.com offers a few tips for avoiding frozen accounts: find out when accounts will be frozen, figure out what activities will keep them from getting frozen, and do what it takes to keep your account active.

Further reading:

• Best Reasons for Using Online Banks

When you pay with plastic, retailers have to pay swipe fees. Whether or not they can pass that cost on to you depends on several factors, and some merchants are illegally adding swipe fees to customers' bills.

If you use a debit card (as opposed to a credit card), you should not pay swipe fees. Recent laws that allow merchants to pass on those costs apply only to credit card transactions. However, in some places, the rule is: if you pay with plastic, you'll have to pay extra. Smaller merchants may be doing this by mistake (changes in law can be confusing), but larger organizations that should know better are also doing it. At GoBankingRates.com, Casey Bond reports being charged at mom-and-pop establishments and well-established gas stations.

When you're out shopping, remember that debit card rules are different from credit card rules. In some states, retailers can charge extra if you use a credit card. They can also require that you meet minimum purchase amounts. However, they're not supposed to do this if you use a debit card. You're probably paying these fees anyway -- retailers build them into the prices you pay -- so don't pay twice if you don't have to.

Consumers continue to learn more about credit scores, but a few common myths continue to cause confusion.

A new study released by the Consumer Federation of America and VantageScore Solutions shows that 40% of people think that their age and marital status affect credit scores. In fact, neither of those characteristics should directly affect your credit score. If you're young, there's a possibility that you have had less time in life to develop a credit history, but even older consumers may have "thin" credit files. Likewise, marital status isn't part of the equation. Sometimes one spouse does all the borrowing, and (depending on whether or not the loans get paid off) that person might have good credit while their spouse has a thin file, but credit scoring models really don't care whether or not you're married.

In addition, 40% of consumers didn't realize that lenders use credit scores to decide whether or not to approve loans (and to decide whether or not to offer the best interest rate). It's important to know that your credit score is one of the major deciding factors; your income -- or your ability to repay the loan -- is probably the next most important factor.

If you're suffering from bad credit, be sure to study up on how credit scores work. It's not rocket science, but high scores don't come quickly or easily.

Further reading:

• Best Reasons for Using Online Banks

What do you do when you find that you can earn more on your savings at another bank? Some people, known as "rate chasers," don't even have to think about it -- they'll open a new account and transfer funds to the bank that pays the most.

If you do this repeatedly, you'll end up with a lot of bank accounts. The "best" bank changes from time to time as banks change their rates. Eventually, you may begin to wonder whether it's worth it. Charles Rechlin at Bankaholic.com describes how, with roughly 30 bank accounts open, he's grown weary of chasing rates. In his words:

"I wanted to avoid the hassle of opening an account at, and familiarizing myself with the peculiarities of, yet another bank or credit union."

It's not difficult to open new accounts, but it is time consuming. Plus, you'll have to keep track of everything (that's 30 passwords to manage, and you have to remember where your money is and how best to move it from place to place). For some, it may be worth it to earn an extra 0.10% APY, but it's probably only worth your time if you have a lot of money saved. For others, there's not much to gain.

There's nothing wrong with switching banks for a little extra money; just be sure that you know how much time you're spending and decide whether or not it's worth the hassle.

Further reading:

• Bank Rate Chaser - Definition