OVERDRAFT FEES -- Constancy Amidst Change

If you've paid any attention to the media in the last month, you're well aware of the credit card company "ploys" that have been employed to trap consumers (i.e., changing interest rates, fees, and other information) prior to the C.A.R.D. reform scheduled to take effect on Feb. 22, 2010. Some of the recent tactics include closing card accounts, hiking interest rates on existing balances, cutting credit lines, and raising minimum payments. Think you're immune because you don't carry a balance? Think again ... B of A (which already raised rates last June) has moved onto plan B, "experimenting" with annual fees of $29 to $99 based on "risk and profitability" (meaning those of you that don't carry a balance/pay in full monthly).

If you're trying to find a silver lining, there is a small one. One of the card reforms that occurred last August now requires companies to provide a 45 day notice prior to 'significant' changes in contract terms. Accompanying the notification will be steps to take to either close the account or to opt out of the new terms and maintain the old terms (which will close the account but allow you to pay off any debt at the prior terms). The bottom line is that with all of the changes taking place, you'll want to start paying closer attention to the 6-pt font correspondence/legalese your CC company sends you.

OVERDRAFT FEES - CONSTANCY AMIDST CHANGE.
Well, amidst all of the turbulence and change, there has been one constant ... Overdraft fees! I read a study this week that was published by the Center for Responsible Lending about the "explosion" in overdraft fees that have increased 35% in the past two years (not a bad move in revenue in recessionary times)!

Current standard practice for most banks and credit unions is to automatically enroll checking account customers in an expensive overdraft program that generally generates fees of nearly $35 per overdraft. Fortunately, this "service" as most institutions perceive them, will also be modified with the upcoming (February) reform. Consumers will need to authorize financial institutions to provide overdraft "protection" as opposed to simply letting the charge be denied. The CRL findings report that the majority of consumers (~80%), including those that have recently overdrawn their accounts, would prefer that overdrafts not be covered. Obviously this would be very easy to implement as the vast majority of overdraft fees are triggered by debit card transactions and ATM withdrawals, not by checks. In addition to authorizing the overdraft, the law also states that the fees must be "reasonable." Who knows what that means. The fact that over 25% of all debit card transactions are for purchases of less than $10 indicates that a $35 fee would not be reasonable. The fees are currently more than twice the amount of the original overdraft amount. Overall in 2008, consumers owed $45 billion for the $21.3 billion of credit that was extended. Unfortunately, the most likely to fall into this trap? Lower income groups and young adults (18-25).

To put the ridiculousness of overdraft fees into perspective, consider this. Americans will spend considerably more on overdraft fees this year ($23.7B) than books ($14.2B) or postage ($18.3B).

Additional Findings of Interest:
* 50+ million checking accounts overdrawn over 12 month period.
---> Over 1/2 of those (27 million) had 5+ overdraft incidents.
---> 18 million consumers had 10+ overdraft occurrences.

* Banks/CUs collected nearly $24 billion in overdraft fees in 2008.
---> Analysts estimate this will balloon to $27 billion for 2009.

* Banks make more on covering overdrafts than CC penalty fees.

Additional Resources:
-- Center for Responsible Lending Full Report
-- FDIC Study of Overdraft Programs
-- Overspending on Debit Cards is a Boon for Banks (NY Times)
-- Proposed Amendments to Regulation E

IS EXTRA EFFORT WORTH IT FINANCIALLY?

When I was a professor of personal finance, it continually surprised me to hear comments from students suggesting just how "convenience-driven" they were. When asked to choose between a financially prudent choice and one based sheerly upon convenience (i.e., selecting a lower interest rate at one institution vs. a higher rate with their existing bank/credit union), most selected the convenient (higher cost) alternative. Even after nearly a decade of teaching personal finance (and a degree in psychology), that frame of mind still doesn't add up for me. I personally believe that a little bit of added effort can pay big financial dividends. Let me offer a couple tangible examples ...

AUTO LOANS.
Auto loans can be a very 'tricky' product, particularly for used vehicles. Often, interest rates sit at double digits. Information supplied by Bankrate shows that an "average" 48 month loan for a used car is currently 7.7% (slightly lower (7.56%) for a 3-year loan). I am definitely an advocate of using Bankrate as a tool with which to compare loan offers and gauge expectations.

I've seen several references in the past few months to Pentagon Federal Credit Union and their impressive car loan rates (3.99% used auto loan rates!). The lesson here? It's more than just simply shopping to find the best rate ... I think most people would automatically discount this option assuming "I can't do this because I'm not a member of the military." Before giving up (particularly given the current economic environment where many companies are opening a back door to customers when the front door seems to be closed), look a little closer ... Not only is credit union membership [at Pentagon Federal] open to the military; but also to government employees, Red Cross volunteers, as well as members of the National Military Family Association (a group open to anyone willing to pay the one-time $20 membership fee) ... a pretty small price to pay for a sub-4% interest rate!

MANAGING RISING INSURANCE PREMIUMS.
When our insurance renewal came recently in the mail (informing us that our premium would be increasing 20% over last year), I first called to find out why. There were no accidents, no insurance claims, no change in credit status, or any other 'logical' explanation for the increase. When they didn't have any good answers, I informed them that I'd be calling to cancel the policy in a few days. I called them later that week to inform them that I wouldn't be renewing our policy after we not only found a lower cost option; we found a policy that cost less than we had been paying the prior year! Be willing to stretch yourself and go beyond your comfort zone and you'll often find "greener grass." FYI - www.insure.com, www.insweb.com, and www.insurancefinder.com are some of my favorite online resources for insurance shopping.

I would argue that if you look around, you'll see that a little extra effort will go a long way in your financial world ... you'll save more, spend less, and more prudently invest and plan for the future. THE LESSON?? A little bit of extra effort can pay big dividends.

FINANCIAL SITES -- MY 'FAVES'

I'm frequently asked to share information about good places to gather financial information. Where is a good site to find a credit card? Where would be a good place to open a Roth IRA? How do I go about freezing my credit?... etc.

This week, I have decided to share some of my favorite financial websites. Keep in mind that these are MY faves, thus the links provided are my opinions (appropriate since this is MY blog). This is designed to strictly be informational; it is not intended to be an exhaustive list by any stretch (I decided to stop after 20 topics). Feel free to share your faves (doctormoneyman@gmail.com).

CREDIT RESOURCES.
- Credit Card Search
- Credit Freeze Information
- Credit Scoring
- Ordering Free Credit Report

FINANCIAL PLANNING RESOURCES.
- Asset Allocation
- Bonds
- Index Investing - Top 3 (A, B, C)
- Insurance Information
- Mutual Fund Analysis
- No Load Mutual Fund Companies - Top 5 (A, B, C, D, E)
- Saving For College
- Tax Assistance

OTHER FINANCIAL RESOURCES.
- Budgeting
- Cooperative Extension
- Financial Calculators
- Identity Theft
- Interest Rate Information
- Managing Debt
- Organizing Financial Records
- Student Financial Aid