Bank practices: The good, the bad, and the ugly
WalletPop got on the phone with a few top consumer finance experts at watchdog groups -- people who track what the banks are doing day in and day out -- to ask them what today's customers should appreciate and what they should avoid at all costs. Here's our roundup of the good, the bad and the ugly.
Direct deposit: If your employer or benefits distributor offers this, sign up for it. There's no question this is a good thing. Nearly all the experts we talked to said this is one of the most consumer-friendly practices banks offer today. Not only does your money get into your account up to five days faster than if you deposited a paper check, direct deposit eliminates the errand of physically going to the bank to deposit it. Often, direct deposit makes you eligible for free checking at most banks (although not Citibank, come February). "Generally it's safe to say direct deposit benefits consumers," Consumers Union staff attorney Lauren Bowne told us. In other words, it's a no-brainer.
Online budget tools: One helpful thing banks have been doing with all that bailout dough is building tools that help you manage your money and watch your budget right from your computer screen. Bank of America, for instance, has an online tool called "My Portfolio" that lets you categorize and track your spending by category, so you can see, in an accessible chart format, how much you're spending on things like groceries, gas and even housing. It lets you tally up your net worth and even lets you include non-Bank of America brokerage accounts. Regional bank PNC offers something similar to its customers: a budget calculator called "Virtual Wallet."
Charging for checking: Despite well-publicized events like Citibank eliminating two waivers for monthly checking-account fees, there are still plenty of free checking offers out there. It just doesn't make sense to pay several dollars a month to access your own money. "I don't see any reason to pay for an account in this day and age," says Linda Sherry, director of national priorities for the group Consumer Action. Some detractors say the bank needs to charge customers for the services they get, but that's not exactly true. Your bank earns interest on your money when they lend it out to other institutions, and Sherry points out that banks make money via what are called "interchange fees" every time you use your Visa- or Mastercard-logoed debit card. (This isn't a fee you pay; it's paid by the merchant.) Charging a monthly fee is especially hard on lower-income Americans, says Jose Garcia, associate director for research and publishing at consumer advocacy group Demos.
Manipulating transaction order: This ties into those sneaky overdraft fees (see "The Ugly," below). If a bunch of debits need to be processed at once, banks habitually start with the largest one and move down. They say this is because large transactions tend to be important ones like mortgages, utility bills and car payments -- none of which you want to bounce. With the near-mandatory overdraft "protection" most banks force on you, however, this wouldn't happen anyway. Instead, what does happen is that you get charged overdraft fees that could have been avoided. Say you have $200 in your account, and on the same day, you spend $30 on gas, buy your co-workers coffee for $10 and pay another $10 for lunch. So far, so good. Now say you have a $200 car payment coming out of your account that day. A bank will process that $200 transaction first, then put through the smaller transactions and hit you with an overdraft charge on each of those three smaller purchases. If they'd run the car payment through last, you'd have only paid one overdraft charge.
Funds availability: You've probably already noticed this even if you didn't know what it was called. This is the loophole that lets a bank take money out of your account the second you make a purchase but won't give you access to a check you deposit for up to five days. Even more frustrating, if you have two bank accounts at different institutions and you transfer funds from one to the other, it could take up to that five-day maximum to get your own money. The rule governing this is called "Check 21," and Consumers Union's Lauren Bowne says there's "definitely room for improvement" when it comes to how banks implement this. While direct deposits go into your account immediately, local checks take two days to clear and non-local checks take five days -- that's nearly a week of being without your money!
Overdraft "protection:" All of our experts flagged this as the worst of the worst way banks sock it to you. Since customers are automatically "enrolled," they might not even know about it until they're charged $35 or more if their account overdraws by even a penny. Banks claim this is for your benefit; they say that customers actually want to pay through the nose to avoid the embarrassment of having their debit card declined. We'll be able to find out if there's any truth to this assertion next year, when new Federal Reserve regulations will limit how and how often banks can charge you overdraft fees and require that you sign up in advance if you want this dubious "protection." We've written about it here (and lamented the long lead-in time here), and the bottom line is that no personal finance expert believes Americans are going to voluntarily choose to be charged in this way. Guess the banks will just have to find another way to make up the $38.5 billion that overdraft fees are earning them in 2009 alone.