Smart Banking

By paying attention to your bank accounts you can easily save more of your hard earned income and make your savings work harder for you.

1. Why Banks? First, remember banks are in the business to provide three basic services; to facilitate financial transactions, to provide a place to store funds for future use, and to lend you money when you do not have it. These same services can be provided without a bank if need be, most of us simply do not think of the alternatives. Some of the common alternatives are credit unions, suppliers, loans from a seller or loans from family or friends.

2. Borrow money from a non-bank. Often the bank is the last place to look for a loan. Perhaps the seller will carry some financing on the item you wish to purchase. Perhaps a family member would be willing to loan you the money. This is the way financing used to be handled before banks got their foothold. You can often receive a decent interest rate at 2-5% less than what a bank may charge and provide the same legal protection to the borrower that the bank would demand. As an example, no one would go to their bank to get a loan on a new car purchase if the dealer is offering 9% financing, but you can get a loan from your brother for 6%. Apply that principal to all of your purchases involving credit

3. Leverage your Relationship. Banks often give special treatment to accounts that are worth more to them. Ask your bank what breaks they will give you if you consolidate your accounts with them. You can often get your credit card interest rate reduced 1-5% by consolidating your credit card debt. Checking fees get waived, minimum balances are forgiven and much more.

4. Work on lower fees. You should always be able to find a checking account that is truly free. But beware, free is often only free if you use the account the way the bank wants you to use the account. If you receive a fee, call and try to get the bank to waive some or all of the fee. They will often do so, especially if you have a large financial relationship with them.

5. You can always find no fee credit and debit cards. Visa and Mastercard are owned by the banks that distribute the cards. So a Visa card is a visa card is a visa card, whether it's issued by Citicorp or by the Northwest Airline Credit union. There are numerous places to get the credit and debit cards without paying an annual fee or without paying a high interest rate.

6. Shop and Negotiate. Almost all banks will negotiate a loan rate and fees, but most of us are afraid to deal with banks or cross out clauses in their loan documents. Always shop two or three lenders for the best rate AND tell them you are doing so. Get bank fees reduced or eliminated. Play one bank off the other.

7. Borrow when you don't need it. Unfortunately, banks want to lend money to you when your financial condition is at its best, but they don't want to lend when you are in dire need of the funds. To solve this problem, the best time to apply for credit is when you need it the least. So expand your credit limit on your credit card of choice when your payment history and income is at its best. Or if you have equity built into your home, look into establishing a home equity line. Unlike a loan, the home equity line allows you to create a loan when you need one not unlike a credit card. So you can establish the Home Equity Line when times are great without establishing a debt until you need it. Better still, the interest you pay on the line is often tax deductible.

8. Avoid ATM fees. Many banks are now charging fees for using ATM machines. This $1.00 to $2.00 fee is charged every time to withdraw your funds. Imagine, you give the bank $1 for the privilege to receive your own money while saving them teller wages. To avoid this, find a bank that does not charge ATM fees for withdrawals from their ATM network (called "on-us" transactions).

9. Use Debit Cards Wisely. The Debit card looks like a Credit card, but the funds come directly out of an underlying checking account. This plastic card has the Visa or Mastercard logo on it so merchants will accept the card anywhere Visa or Mastercard is accepted. Banks love this product because it takes an expense (processing a check) and turns it into revenue (the Retailer pays a fee for the Debit transaction). The problem? Many users of debit cards fail to make the entry into their checking account, so the banks collect more overdraft fees. In addition, if the card is lost or stolen your checking account becomes a mess. The account must be frozen, then closed and you are liable for up to $500 in losses. Imagine, your debit card is stolen so you have to close your account and yet your home mortgage check is outstanding. The debit card is a great way to use your checking account anywhere in the world, but use it with open eyes.

10. Avoid the Overdraft Checking Trap. Overdraft checking is attached to your checking account and "kicks in" an instant loan when your checking account hits zero. There are many versions of this account and it is a nice way to avoid overdraft fees on your checking account. This account is a large profit center for banks because it provides a nice rate of interest and most people do not pay the loan back immediately. Many banks also charge a fee for the use of the protection. Look for a bank or credit union that will shift funds from a savings account instead. The foregone interest revenue is always cheaper. Or make sure you pay the overdraft loan back immediately.

11. Bank Savings Accounts are a Suckers bet. Money market mutual funds almost always provide a better rate of return without much more risk. While Money Market Mutual Funds are not FDIC insured, the accounts have been in existence since the early 70's with virtually no losses.

12. Understand Bank Fees. The push for additional profitability at most banks is now focused on generating fee income. Understanding what your bank charges and when you will be charged can help you save money. For instance, many banks charge fees when an account balance dips below a certain level. It is important to know the dollar amount and how is it determined. Do they use the average balance over the month (best case) or do they "get you" if your balance dips below the minimum on one day (worst case)?

13. Fees Generating Fees. Ask if your bank's fees generate fees. A common culprit of this fee-generating device are large auto leasing companies like GE Capital. For example, say your payment per the bank, is received (processed) a day late but you thought you mailed it on time so you dispute and do not pay the late fee. Your next statement would show the unpaid late fee generating another late fee. This despite the fact that your actual payment history is accurate. Read the fine print on all loan agreements and cross out this language or write in the contract that the bank may not charge late fees on late fees. Banks provide a vital service to each of us, but like anything else you can save tremendous amounts of time and money by actively managing your financial relationship with them.