Banks aren’t tightening in one Area

Due to losses in banking activities across the board, and in credit cards specifically, banks have been tightening lending standards, lowering credit limits, and raising fees wherever they can. Other factors for credit card issuers are the enactment of The Credit Card Accountability, Responsibility, and Disclosure Act (aka the Credit CARD Act) and the creation of the Consumer Financial Protection Agency which is mandated to oversee the CARD Act. The Credit Card Act, which starts phasing in provisions in August, was pushed through Congress by the Obama Administration and signed into law in May. The law’s goal is to reign in fee and interest rate increases by credit card issuers but is full of loopholes and has given the issuers enough advance notice to allow them to raise rates, convert fixed accounts to variables, and hike fees ahead of any limitations which would curb the activities. In reaction to the bill, issuers have promised to tighten lending standards and make it tougher in general for their cardholders. One of those promises will be carried out by Chase as they raise their minimum payment percentage from two to five percent on outstanding balances for a certain card holders. That one action will prove to be an unsustainable burden for already struggling customers as, for example, a six hundred dollar minimum payment requirement becomes fifteen hundred dollars. All things considered, it is interesting to note then that there is one area where issuers aren’t tightening their standards. The single category where standards are being loosened is in overdrafts on checking and debit cards but it’s not for the purpose of extending an olive branch to hard pressed customers. Called “courtesy overdrafts” by the industry, banks are now allowing bigger and more frequent overdrafts on these accounts and then charging huge fees for the courtesy. An action that was originally part of good customer service has been morphed into one of the biggest revenue drivers at banks across the country as coached by a new breed of consultants that teach banks how to wring more money out of each customer. The practice is now being used at the ten largest banks in the country and, with an estimate of $38.5 billion in charges for this year, will generate almost twice as much as late and over limit fees on credit cards. Bank of America allows ten overdrafts per day currently, up from five in 2008. Industry experts, seeing a shift away from credit cards to debit cards as consumers become more averse to carrying debt, are forecasting steady increases in courtesy overdraft fees for years to come. The banks also rig the courtesy overdraft system to generate maximum fees per overdraft. The system as devised by the banks can even hit an account with overdraft fees when specific charges don’t result in an overdraft. In fact, an account can have enough money in to cover charges all day long but if the last charge of the day overdraws the account, the bank can charge courtesy overdrafts on every charge made that day. In that scenario, the bank could extend $10 to cover the last overdraft and then charge the customer $35 for every other charge made that day. If there were ten charges prior to overdraft, the customer would be out $350. Another way banks rig the game is that regardless of the order in which charges are made, banks will put the daily charges in order form largest to the smallest. The banks say they structure it this way because they assume big checks, like mortgages, should take priority and hit the account first to avoid being returned. What it also does is reduce risk for the bank while allowing for more fees to be charged to the customer. By covering a big check first with funds on hand, the bank can then charge overdraft charges on expenditures as small as one dollar while extending a minimum of “credit”. Percentage-wise, it’s great business for the issuers. According to the Federal Deposit Insurance Corp., if banks cover a $20 purchase and charge a $27 fee, the loan has a 3,520% annual percentage rate (APR) if paid back in two weeks. Threatened with legislation to regulate the abuses, the industry is fighting any form of regulation on overdraft fees simply due to importance of the fees in relation to their bottom lines. "Overdraft fees are the mother lode of (deposit) fees," summarized Michael Moebs of Moebs Services, an economic research firm. "If it weren't for overdraft fees, 45% of banks and credit unions wouldn't have made money in 2008." What can consumers do? While banks are drawing a line on returning courtesy overdraft fees, a phone call can to the branch or customer service can still result in a positive outcome. Additionally, sign up for online banking or find out how you can track your account via phone. If you’re low in the account be sure to check your balance before charging something else to your account. If you’ve put a number of charges through during the day be absolutely sure to do it. Go over on your account by a dollar and that $3 frozen yogurt could end up costing you $300 in “courtesy” extended by your bank.