The banks, too, are your enemy

My column in the paper today is about a Lenten money fast, as promoted by Washington Post columnist Michelle Singletary (read her columns here).

The idea is to make yourself free of payday lending places by taking control of your home finances. Cut your spending down to the most basic of basics, you can save enough to put aside an emergency fund so, the next time you need a couple of hundred dollars for an emergency, you have it.

This ought to be a simple concept, but in America in 2010 it is anything but. Americans are addicted to credit, consider debt normal, and don’t seem to mind living on the edge.

Banks depend on us going over the edge. They need us to, and even want us to.

For example, today’s New York Times has a good article here (click) about how, with the new debit card and credit card rules, banks are going nuts trying to figure out how to keep people paying overdraft fees. Those fees, something like $20 billion a year, are now a huge part of banks’ profit, figured into future growth, necessary for their stockholders survival.

In short, banks NEED people to be foolish.

The new law requires you to specifically opt-in to the overdraft “protection” program. What this means is, if you swipe your debit card, and you don’t have enough money in your account, instead of being denied, the payment is approved and you pay a $35 overdraft fee to the bank, even if the overdraft was just a dollar or two.

Banks are sending out  scare letters saying that you really really need this overdraft protection in an “emergency.” However, the vast majority of overdraft fees are paid by about 14 percent of debit card users, who pay 95 percent of all the fees.

Which means those are not emergencies, those are people who either don’t mind paying triple for their soda and crackers at 7-Eleven, or they have no clue how to manage money. Either way, for banks to seek those people out and rely on them for income is predatory.

At least one person in the comments section of this story looked at the numbers:

There are approximately 1110,000,000 households.

14% of them (1,554,000) pay 93% of these overdraft fees ($20,000,000,000) or $18,600,000,000 a year.

That is $1,197 a year for each of those households in overdraft fees!

That’s a lot of money that those families, I am guessing, can’t afford. $1,200 a year is two months rent, four car payments, three months of groceries.

Those people don’t need overdraft protection, they desperately NEED the bank to tell them no. They need the bank to tell them “You have no money, quit spending it.” They need a crisis to make them pay attention.

Banks used to do that. Telling people no protected the bank AND served as a way to educate the public. It encouraged the Republican and conservative principle of careful and conservative money management.

But now the banks allow people — nay, encourage them — to run up overdrafts and pay overdraft fees, saying “well, it is their job to manage their money, not ours. Is if our fault if their poor management enriches us?”

Yes it is. Especially if they intentionally market ways to avoid the consequences of bad management with the sole purpose of keeping profits flowing. That’s the morality of the drug dealer and no different at all from the morality of the payday loan operators.

I’m amazed the organized crime doesn’t sue for infringement of its business model.

Bottom line: Go on a money fast. Learn to manage your money. If you can’t pay off your credit card, in full, each month, quit using it. And treat your debit card like a check machine — record each charge in a check record book, do the subtraction after each charge, and when you get down to $50 in your account (a very minimal cushion) put it away and say “Sorry, out of money.”

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13 Responses to The banks, too, are your enemy

  1. Doug Gibson says:

    It would be interesting to know how much banks, and other sectors of the economy, rely on consumers’ inability to abide the law of deferred gratification. What the heck did banks do to make profits before personal credit became so easy to obtain?

  2. flatlander100 says:

    Beyond the core fundamentals…. readin’, writin’, ‘rithmatic, health, and civics plus the sciences history, especially as labs in how to draw conclusions based on evidence… I’m generally loath to see state legislators load up student course schedules with mandated courses, particularly since such courses tend to be \message\ courses designed to convince voters the legislators are more patriotic than god [god of course being understood by those legislators to be an American].

    That said, I’ve seen enough financial wreckage among students [in my own family and out], who have no earthly idea how to balance a checkbook, or how to determine the real cost of things, to them, particularly when they charge them, that I’m beginning to think a mandatory course in Personal Finance ought to be included in ALL senior-year student schedules. [Dear Rep. Buttars: if they get nothing more out of senior year than an understanding of why payday loan places should be avoided like the plague, why they should --- loudly --- refuse \overdraft protection\ on their debit cards, and why it's a bad idea to become car-poor or house-poor [meaning to buy a car or a home at the absolute upper limit of what a bank , car dealer or mortgage broker assures you you can afford such that any reduction in your income puts you in trouble on the loan], and how to do a monthly survival budget for themselves such as every surviving business owner does, so he will know the monthly \nut\ he must meet to keep his business open —- if they learn nothing else in their senior year, the year will have been well spent.]

    I read a lot of moaning in newspaper columns, and magazine columns, on the business pages, about the level of economic ignorance in the land, but they usually mean how little people understand about M1 or M2, or the GNP and the GDP, or the current fedfunds rate and the like. Important topics, without question, but expecting young folks, or anyone else, to grasp anything about macro-economics [and to make voting decisions based on that grasping] when they can’t balance a check book, or figure out how much they have coming in each month, or why charging something you cannot pay off immediately inevitably lowers your monthly disposable income, is living in a fantasy world.

  3. Michael Trujillo says:

    Back when I was younger, I got one of those $300 limit credit cards. In my naivete, I thought it meant that when I got to my $300 limit, the card would stop paying charges. Consequently, I only kept a “rough” calculation of by card balance. Imagine my surprise when I received an over draft fee on my bill. I called customer service to complain. I should only be able to buy $300 dollar’s worth of stuff, I explained, if I try to go over $300, the card should be declined. The service rep replied that they “wanted to spare me the embarrassment of having my card declined.” I told him that I don’t embarrass very easily and I want the card to have a definite, no bullshit, $300 limit. He instructed me to type and sign a statement to that effect and fax it to a number he provided me with. He then warned, “Once you do this, you’ll never be able to reverse it.” I said GREAT!

    In response to flatlander, I’d just like to say that I was one of those young people who was woefully ignorant of just exactly what I was paying when I used a credit card. I believed that if I just got my payment in “whenever”, and didn’t get “too far” into the red, I would be OK. I’ll admit that it’s taken a lot of education from the school of economic hard knocks to really “get” what the credit card issuers like to do to the majority of us. Consequently, I don’t have any credit cards now, and I can’t foresee a day when I’ll want one. I pay as I go.

  4. Scott Parkinson says:

    Oh Charlie, the danger of journalists over generalizing. I am a community banker and resent what you are saying. How about using the term Some banks…? BTW, “some” credit unions have this service also and are making the same fees. Do some research and call me if you want the a more accurate story. I totally agree with you column today…just not your blog.

  5. rick stewart says:

    charlie – i have a free checking account at wells fargo, in which i keep a very minimal balance … it’s an account i keep separate and use only for online purchases (to better protect myself and my primary account at another bank) and when i want to make an online purchase, i make a deposit into the account first … when i asked the bank how they could afford to give me free checking with no minimum balance, the guy i was dealing with smiled and said “overdraft fees.” … they’re betting that i’ll sign up for the free checking, but that eventually they’ll get me with the overdraft fees …

  6. Neal Humphrey says:

    The various financial institutions should be required to call these revenue shenanigans what they are: the “vig.”

    By way of explanation, the “vig” or “vigorish” is a loan shark’s exorbitant interest and fees. The word is derived from the Yiddish, “vyigrysh,” which means “winnings.”

    Lending institutions intend to win, no matter what it costs their customers.

  7. flatlander100 says:

    NH:

    Lending institutions intend to win? Well, if \win\ means \make a profit,\ of course they do. They couldn’t stay in business otherwise. And we — those of us who are not independently wealthy — need them to stay in business, because we need them now and then to lend us money. To buy a home [my mortgage came from Wells Fargo], to buy a car [my car note is with Weber State Credit Union], to go to college [one kid's loan is from Key Bank], for medical bills we cannot cover immediately [thanks to having no national health care plan], to provide checking and saving services which greatly simplify all kinds of financial transactions for ordinary folk, and provide safe [thanks to FDIC, and thank you again FDR and the New Deal for that] places to save money.

    So of course they’re going to try to \win\ — i.e. make a profit. And they should.

    The problem is not that they’re profit seeking institutions, that they’re trying to \win.\ The problem is two fold: (a) that far too many of them, particularly the large banking corporations, are far too willing to take wildly speculative risks to achieve not merely profit, but obscene profit, with little or no downside for those making the decisions because the Fed will bail them out if they screw things up badly, as they did, and because the same people who make the bad decisions keep paying themselves six and seven figure dollar bonuses each year for their expertise in having made those bad decisions. And (b) too many of these institutions, again particularly the large corporate banks, have all but abandoned what used to be a major role of banks, counseling their customers about making wise financial decisions, not looking for ways to extend more and more credit while also looking for ways to collect more and more punitive fees when that credit proves to have been excessive. Especially when their speculative gambles [on derivatives or the real estate market] collapse and they need to increase profit from fees and penalties to offset losses elsewhere. Or think they do.

    bennett no

  8. Scott Parkinson says:

    flatlander…well said.

  9. ctrentelman says:

    I’m happy to admit I may have painted with too broad a brush, Scott — but you must admit that you see darn little of the former educational role of banks these days.

    I’d love to see the educational function of banks take a much higher profile. If people hear “no” from their banks, followed up by “but here’s what you need to do,” in the long run it will benefit us all, and if Bank of Utah is doing that now, more to the good.

    The problem flatlander points out is that, if some banks are making money by making people think they can always qualify for loans, no matter how crazy they’ve been in the past, it puts the more responsible institutions into a tough spot.

    Bad money always drives out good, and a competitive race to the bottom, such as we saw with the subprime mortgage situation, makes the mafia look like benevolent lenders. The fact that payday lenders can exist tells me that there is something banks are not doing right.

    Them and the educational system.

    I’m with Neal on calling the interest payday lenders charge “Vig.” It was a sad day when the government did away with usury laws and let so-called private enterprise set the rates.

  10. Neal Humphrey says:

    I’m in a bit of a high dudgeon with lending institutions this week because several people at my bank (Zions) can’t do simple arithmetic and, therefore, their job. And I’m the kind of guy who can build an amortization schedule in Exel in a minute or two.

    I think the topic here is predatory lending practices (vigorish) that put people into perpetual debt and provide the lender with more than profits – in effect, an annuity.

  11. flatlander100 says:

    Charlie wrote: “I’m with Neal on calling the interest payday lenders charge “Vig.”” Yup. Great term and absolutely appropriate applied to pay day lender rates that can run to 400% a year. But also appropriate , as Neal notes, to the “predatory lending practices” of some ostensibly more respectable institutions like banks and CUs.

    And I intend henceforth to ask any banker or CU person I may have occasion to talk to about a loan or about overdraft or similar charges by asking them, politely of course, “what’s the vig?”

    Owe you one for that, Neal. Many thanks.

  12. Neal Humphrey says:

    If you want an example of how usury history is repeating itself just Google “Uniform Small Loan Law.”

  13. Leslie says:

    Ah, human nature. How much longer do you think our society can exist? Pracitces like these are what led to the demise of every single country that was great – the world leader of their time. When money becomes more important than people, it’s time to move over because you ain’t gonna be #1 for long.

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