Photo (cc) by HowardLake
You trust them with your money, but they may be putting the proverbial knife in your back.
While some banks go to great lengths to set up friendly neighborhood branches – complete with smiling tellers who know you by name – the fact remains that big banks are big business. And in case there was any doubt, big businesses are all about making big profits.
Banks can be so into making money they sometimes walk the line of what is legal or ethical. Here are five ways your bank may be ripping you off in their pursuit of profits.
1. Misleading you about bank fees
Bank fees, glorious bank fees! If you have ever wondered how banks make money off of checking accounts, this is it. A report from the federal Consumer Financial Protection Bureau found that 61 percent of a bank’s checking account revenue comes from overdraft and NSF fees.
Now, the government tried to protect you from yourself back in 2010 by requiring banks and credit unions to have consumers opt in to so-called overdraft protection programs. Previously, many accounts were automatically enrolled, enabling banks to let your overdrafts go through and charge you a large fee for each one.
However, many institutions were apparently not clear about what overdraft protection entails. A 2012 report from the Pew Charitable Trust found that more than half of those who had incurred an overdraft fee in the past year did not realize they had opted in to the program.
2. Jacking up your costs
Speaking of checking accounts, even if you have a so-called free account, you may be paying significantly more than you were even a few years ago.
Bankrate.com surveys bank fees annually and has found the costs associated with checking accounts haven’t gone up a little; they have gone up a lot.
Check out how much the following fees went up from 2007 to 2012:
- Average overdraft charge — up 11 percent.
- Average ATM surcharge — up 40 percent.
- Average monthly service fee — up 142 percent.
Plus, the minimum balance needed to avoid a monthly fee jumped 365 percent in a five-year period to an average of $723 in 2012. So much for free checking.
3. Looking the other way when fraudulent charges appear
If it weren’t bad enough that banks are increasing their fees and other costs, even worse is the fact that some banks apparently don’t care if their customers are fraudulently charged.
The New York Times came to that conclusion after it analyzed hundreds of court documents this past summer.
According to the report, some banks regularly allow suspicious transactions to withdraw money from customer accounts. Banks that allow such transactions stand to make a lot of money from processing and overdraft fees.
While the report focused on two banks in particular, federal officials told the Times the problem is widespread.
4. Facilitating consumer-gouging payday loans
You may think you are smart enough not to use a payday lender, but don’t be so sure. Some banks offer cash advance products that are essentially the same.
The Center for Responsible Lending says some institutions extend money to customers who then pay it back along with a fee that is the equivalent of up to 365 percent interest. These aren’t small, backwoods banks either. They are big names that include Wells Fargo, Fifth Third and Regions Bank.
Meanwhile, other banks appear to be helping out-of-state payday lenders circumvent state laws by allowing them access to customer accounts via automated clearing house transactions.
For example, payday lending is illegal in New York, but residents may be getting around the law by using online cash advance services. In response, the state this summer asked banks not to allow transactions from known payday lenders.
According to Bloomberg, residents of Maryland and Pennsylvania are taking a different tack by suing banks they say are allowing payday lending transactions.
5. Continuing to mishandle mortgage paperwork
Finally, you’d think banks would have learned their lesson about mismanaging mortgage paperwork. Remember robo-signing and the $25 billion settlement?
But apparently old habits die hard. The Consumer Financial Protection Bureau found that many bank and non-bank mortgage servicers continue to have sloppy paperwork and are missing protocols to guide the handling of key documents.
Other problems uncovered by the bureau include the following:
- Delays in paying property tax.
- Delays in canceling private mortgage insurance.
- Long application review periods.
- Deceptive communications regarding the status of loan modifications.
How to avoid being ripped off
So now that you know banks don’t necessarily have your best interests at heart – but you already knew that – what are you going to do?
Fortunately, not all banks are bad seeds and there are certainly plenty of affordable and ethical companies out there. To find them, you only need to take a little time to do your homework rather than signing up with the first bank that promises $100 for opening an account and setting up direct deposit.
Try these ideas on for size:
- Credit unions are member-owned and tend to have lower fees and more favorable policies. See if you are eligible to join one in your area.
- Consider using an online bank. Like credit unions, these banks tend to have lower costs, and some – such as Ally Bank – will even reimburse you for ATM fees.
- If you have opted in for overdraft protection, opt out. Do you really want to pay $35 to avoid the embarrassment of having your debit card declined? That is essentially what you are doing with overdraft protection.
- Avoid cash advance programs that act like payday loans. If you absolutely can’t avoid spending money before your next payday, it may be better to swallow your pride and ask for help from a friend or relative. Doing so also gives you added accountability so you don’t end up in an endless cycle of payday loans.
- Keep on top of bank and mortgage statements. It would be nice if you didn’t have to think about it but don’t count on the bank to catch potentially fraudulent charges or to pay your property taxes on time. When your statements arrive, open and review them. Every month.
- Stay on top of loan modification applications. Keep the lines of communication open and think twice before you simply stop paying your mortgage on the promise of a modification.
Not all banks are bad, but remember that all those conveniences they offer come with a price. They aren’t giving you overdraft protection and other services to be nice; they are doing it to turn a profit. Keep that in mind, and you’ll be one step ahead when it comes to beating them at their own game.