February 2012 - Posts - Dollar Stretcher Guest Bloggers
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February 2012 - Posts

  • Overdraft Fees Under Scrutiny Once Again

    by Bill Hardekopf

    Yesterday, the Consumer Financial Protection Bureau formally announced that it will investigate the overdraft fees that banks charge on checking accounts.

    Overdraft fees are charged by banks when customers try to spend more money than they have in their checking account. Banks will allow the transaction, but this service is a loan from the bank and it isn't free. Banks charge a non-sufficient funds fee (NSF) that is typically between $30 and $35. A fee is charged for each transaction paid in this manner.

    In July 2010, the Federal Reserve required banks to receive permission from each checking account customer before the bank provided overdraft protection for ATM and debit card transactions. Before these new rules, most banks automatically added courtesy overdraft protection to checking accounts with details and fees in the fine print. Some customers didn't realize the high price of the fee until they incurred the charge.

    After the rules went into effect, banks continued to aggressively encourage their customers to "opt-in" for overdraft protection and still marketed the benefits of overdraft protection.

    Overdraft fees remain a significant source of revenue for banks. In 2011, banks collected $29.5 billion from overdraft fees, according to research firm Moebs Services. That was down from $33.1 billion in 2010.

    The CFBP is investigating a number of areas when it comes to overdraft fees.

    Some banks are still generating overdraft fees by posting transactions from highest to lowest dollar amount, rather than in the order they occurred. This increases the risk of consumers paying overdraft fees on smaller purchases.

    The agency will look into why low income and young consumers are disproportionately burdened by overdraft fees. According to a 2008 study by the Federal Deposit Insurance Corporation, 9 percent of checking accounts incur 84 percent of overdraft fees.

    In addition, the CFPB is asking consumers for their input on a "penalty fee box" for bank statements. This will be a disclosure where consumers can see how much overdraft fees will be from their bank.

    The judicial system is also tackling the overdraft fee. In February, Chase settled for $110 million a consumer case charging that it routinely reordered checking account transactions. In November 2011, Bank of America reached a $410 million settlement in a class-action lawsuit to compensate debit card customers who were charged excessive overdraft fees between January 2001 and May 2011.

    Overdraft protection is not necessary and opting out is an easy way for consumers to avoid an expensive fee. If you don't have enough money in your account and you don't have overdraft protection, then the debit transaction will simply be declined.

    If you feel more comfortable with overdraft protection, most banks offer cheaper alternatives with a link to your savings account, a credit card, or a line of credit that will cover overdrawn transactions. There is still a fee each time you overdraw your account since your bank performs a transfer, but it is typically $5-$15, much less than the standard overdraft fee. You must contact your bank to set up this alternative service, since it is not part of the opt in selection.

    This is a good time to assess how you monitor your checking account. Set up a low balance alert that will notify you when your account is low. Online banking you can help avoid overdraft situations and help keep up with your account in real time.

    Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates.

  • Legal Rulings Have Dramatically Impacted Credit Card Industry

    by Bill Hardekopf

    Over the past four years, Congress and the Federal Reserve have passed and enacted many rules that changed the credit card industry. While the CARD Act and other reforms have received the headlines, the judicial branch has quietly left its mark on the credit card business. These legal rulings have cost banks and credit card issuers hundreds of millions of dollars, and may have indirectly led to higher rates and fees for consumers.

    Whenever banks incur additional costs or have their revenue stream cut in one area, they typically make up that money by raising the rates or fees in another area. And we, the consumers, will usually be the ones paying the price for those additional rates or higher fees.

    Here is a look at some of the recent legal actions that have had a dramatic effect on the credit card industry:

    • Interchange fees remain a battleground between banks and retailers. Last year, regulations lowered the interchange fee that retailers had to pay banks for debit card transactions. But the rules did not address the interchange fee for credit cards. Retailers have turned to the courts to litigate their way to lower interchange payments for credit cards. Retailers want to add a fee when a customer pays with a credit card, but Visa and MasterCard currently prohibit this. A possible settlement may allow merchants to add a surcharge on credit card transactions. This would help retailers cover the cost of accepting credit cards by passing the fee to consumers and raising the cost of the purchase. Merchants have filed over 50 lawsuits since 2005 to argue that Visa, MasterCard and several banks, including Bank of America, J.P. Morgan Chase, Wells Fargo, Capital One and Citigroup, have collaborated to fix the fees that merchants pay to accept cards, a violation of antitrust laws.

      The trial date is set for September, but an earlier settlement is possible. In the meantime, banks are setting aside cash to pay for the regulations. According to the Wall Street Journal, financial analysts have speculated the pre-tax bill would run about $1.2 billion to $1.8 billion if MasterCard and rival Visa Inc. settle the suit. MasterCard set aside $495 million in its fourth quarter. The Wall Street Journal reported in January that Visa set aside $1.6 billion to cover potential costs from pending merchant lawsuits.

    • Discover is facing regulatory action by the Federal Deposit Insurance Corporation and the Consumer Financial Protection over its marketing of fee-based products like payment protection and other add-on services. Discover estimates that possible losses could exceed $100 million. According to the Wall Street Journal, the company has been accused in lawsuits of misleading marketing tactics to get consumers to sign up for services.

    • In January, the Supreme Court ruled that consumers who sign a credit card agreement which features an arbitration clause do not have the option to dispute any charges or fees in the courtroom. This applies to almost every person who has a credit card, since nearly all credit cards have an arbitration tucked into the fine print. The arbitration clause may restrict consumers from joining class action lawsuits against a company.

    • In November of 2011, a federal judge in Miami gave final approval for a $410 million settlement in a class action lawsuit over Bank of America's overdraft fee. The settlement was divided among the more than 13 million Bank of America customers who had an overdraft during the past decade. These customers claimed the bank processed debit card transactions in the order of highest to lowest dollar amount, so Bank of America could maximize the overdraft fees customers were charged.

    • In November 2011, the court gave final approval of a Currency Conversion Fee Antitrust settlement over how the credit card companies charged fees when purchases were made outside the United States. Nearly $276 million was distributed to 10 million consumers to compensate them for the setting and disclosure of foreign currency conversion fees (lawyers received more than $51 million). Some of the defendants in the case were Bank of America, Chase, Citibank, MBNA, Visa, and MasterCard.

    Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates.

  • Credit Card Debt Continues to Rise

    by Bill Hardekopf

    The latest report from the Federal Reserve shows that consumers used their credit cards quite extensively to fund their holiday shopping.

    Revolving credit, which is made up primarily of credit card debt, increased at an annual rate of 4.1 percent in December. It rose nearly $3 billion to $801.0 billion. This follows a jump of $5.5 billion in November which was an annual rate increase of 8.4 percent. December was the fourth straight month of increases in revolving credit.

    This could be a positive sign that consumers are more confident in the economy. But on the other hand, it could mean that people are struggling and have to rely on using their credit card to make ends meet. Consumers are going into 2012 with higher credit card debt, but the same wages. If consumers have a hard time paying this down, then we might see delinquencies and defaults start to increase by spring.

    Find the latest G19 report here.

    Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates.

  • Reducing Financial Stress in Your Relationship

    by Bill Hardekopf

    In the past few weeks, consumers have received their credit card bills, revealing the financial damage from the Christmas season. Financial relief may be hard to find since Valentine's Day is just around the corner.

    The National Retail Foundation predicts that U.S. shoppers will spend an average of $126 on gifts and treats for loved ones on Valentine's Day, an 8.5 percent increase from the $17.6 billion spent in 2011. While this spending may be good for retailers and romance, it can add add more debt to a budget that is already under stress.

    Money management and spending are landmines that can destroy a relationship. Making financial decisions together can be extremely difficult since many couples can't even agree on what movie they want to see. However, couples that create a workable and efficient financial plan significantly lower their anxiety levels and have more time and money for long-term romance.

    Talking about money may be initially awkward, but don't avoid it. Building a solid financial foundation is much easier than bitterly trying to re-build after a financial collapse.

    Here are 10 tips for couples to help reduce financial stress:

    1. Full Disclosure of All Debt and Financial Obligations

    Get everything out in the open. Make a list of all student loans, car loans, credit card debt, even loans to friends and parents. Get copies of individual credit reports to share the financial past and any accounts that you may have forgotten.

    2. Raise Your Credit Score

    Make it a goal for both partners to have a credit score over 720. This will this help you qualify for the best terms and interest rates on loans and save thousands of dollars over your lifetime. In addition, insurers, landlords and employers use credit reports to make decisions about your application. Raise your credit score by paying your bills on time, paying down your debt and limiting your credit applications.

    3. Plan for Spending

    Both spouses spend money on things they think are necessary, but this is often subjective. Conflict occurs when spending leads to judgment or anger from the other spouse. Together, work out a plan for daily spending and how to save for some of the bigger purchases and even an occasional splurge. This can help remove the temptation to hide purchases and keep secrets from your spouse about spending.

    4. Keep a Credit Card in Your Own Name

    Keeping a credit card in your name helps build your individual credit history. If you are worried about your partner's spending habits, then he or she should not carry a credit card. Add your partner as an authorized user to your account and monitor the monthly statements for any unrecognizable charges.

    5. Pay Off Debt

    Decreasing debt reduces financial stress. The faster you pay off your loan balance, the sooner you can start saving and building a strong financial foundation. When you receive gift money, a bonus, a second job or a tax refund, use this to pay off debt. Making micropayments can help pay down your debt faster. Eat a meal at home or use coupons, and immediately apply the money you saved to your credit card balance. If you have multiple credit cards with a balance, pay off the balance with the highest interest rate and then move to the next-highest rate.

    6. Emergency Fund

    All couples should have an emergency fund of six to eight months' worth of living expenses held in a safe place, such as a money-market fund. Simply knowing it's there can reduce stress, since you know you're not walking a fine line between comfort and catastrophe. Make savings consistent and untouchable by setting up an automated deposit from your paycheck into your savings account.

    7. Monitor Your Accounts

    Even if you divide up bill paying and investing duties, both parties should be able to easily access accounts to know what is going on with your money. Websites like Mint.com can keep track of all accounts, including investment, checking, college funds and loans. This keeps information clear and in the open for both spouses.

    8. Get Help

    If arguments prevent you from getting started or making a financial plan, it may be good to seek professional counseling from a financial counselor or credit counselor. The National Foundation for Credit Counseling can help you find a certified credit counselor in your area. They can help you create a debt management plan. The set up fee is typically $50 and the monthly fee is about $25.

    9. Talk It Out

    Regularly make time to talk about your finances. It is important that both partners actively participate in these discussions. Keep it comfortable and conversational; do not make this a business meeting. It is not a time for blame and accusations. Let it be an open forum where either spouse can bring up problems and issues and even ask for suggestions and help. Let your actions show that you are in this together.

    10. Add Extra Income

    Selling unwanted items at a garage sale or on eBay is a start, but you may have skills that can make extra income. You can make picnic tables and chairs and sell them on Craigslist, or make bows and girls' accessories to sell at children's clothing consignment sales. You can board animals while their owners are on vacation. If you are a former athlete, you can give private lessons to kids learning how to play your sport.

    Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates.

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