MONEY

Should You Opt in for Overdraft Protection?

You can officially say goodbye to that $40 cup of coffee — that is, if your bank doesn’t badger you into paying for it all over again.

Thanks to new Federal Reserve rules, you now can decide what happens when you pull out a debit card to pay for a purchase but don’t have enough money in your checking account to cover it.

Previously, if you didn’t have enough in your account to make a purchase, your bank would generally cover it anyway — at a price.

Swipe for a $3 carton of milk if you only had $2 in the bank, and, without any notice, you’d pay an extra $35 to $40 to compensate for overdrawing your balance. Withdraw $20 from the ATM and the same thing would happen.

Under the changed rules — applicable to new accounts opened after July 1, and effective August 15 for pre-existing ones — attempted debit-card payments with insufficient funds will just be declined, unless users opt into the previously-automatic coverage, which banks liked to call “courtesy overdraft protection.”

The now-optional service — which many banks are spinning as a must-have, you’ll-never-be-able-to-set-foot-into-your-local-deli-if-you-don’t program — isn’t cheap. TD Bank, for example, charges $35 per transaction that overdraws an account more than $5, up to five transactions per day. You pay another $20 if your account balance remains negative for 10 consecutive days.

Interestingly, though the Fed’s new rules are being enacted to protect customers, a Credit.com poll shows that many consumers would rather pay the fees in order to avoid the embarrassment and inconvenience that accompany card rejections. But what are the alternatives if you want to avoid debit-card rejections without paying extra?

Credit.com has a list of suggestions, and we picked our favorite three:

  • Carry around an emergency pre-paid or alternative credit/debit card that you know has money on it.
  • If your bank allows, tie your savings account to your checking account so that any checking-account debit overdrafts are covered by the money in your savings. There may be fees for the transfer, but they’re likely cheaper than the courtesy overdraft charges.
  • Sign up for text message alerts to notify you if your balance falls below a certain threshold (of course, standard messaging fees would apply here).

If you have other payment options readily available — cash or credit cards, for example — don’t opt in for overdraft protection, advises Greg McBride, a senior financial analyst at Bankrate.com. Otherwise, you’re setting yourself up for an expensive fee that can easily be avoided, and which you may not even be aware of (since banks don’t necessarily let you know that a transaction is overdrawing your account). If, however, you don’t usually carry around cash or your credit cards are frequently maxed out, McBride says opting in would be a sensible way to save yourself in an emergency situation when your debit card is your only payment option. But the best solution for avoiding the fee might be the most obvious one: “Everyone needs to monitor their available account balance,” says McBride, “so that they can avoid overdrafts.”

Several MONEY staffers say that in recent weeks they’ve gotten a hard sell from their banks, both online and inside local branches, to opt in for overdraft protection. Confusing marketing gimmicks and persistent sales representatives are aimed at making customers aware of the new option – and signing them up. What about you? Will you opt in? Have you experienced incessant pleas to join? Tell us in the comments.

MONEY

More Money Wednesday Roundup: Copycat Defaults & Worst-Hit Cities

Personal finance from around the Web:

  • In the wake of the credit card law passed last May, understanding all the new regulations that apply to consumers has gotten confusing. A consumer-law professor tries to untangle the legal mumbo jumbo, offering advice in parts one and two. [Bucks]
  • Beer Market: Even St. Patrick’s Day won’t do much to boost lagging brew sales. Turns out Americans are more likely to celebrate the USA by buying a case on the 4th of July than they are when they honor the Irish saint. [CNBC]
  • Is there groupthink at work among “strategic” mortgage defaulters? Recent research shows that borrowers are more likely to walk away when they are underwater on their home if they know someone else who already did. [Los Angeles Times]
  • The Milwaukee Police Department has found itself combating a new hotbed of crime in the cities’ neighborhoods: foreclosed homes. The currently 1,200 vacant properties have become havens for drug dealers, so law enforcement is stepping in to educate residents on how to avoid losing their homes. [WalletPop]

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MONEY

Don’t Sweat it: Canceling a Credit Card Won’t Hurt Your Score

As people have vented their wrath at banks for raising the cost of credit cards — higher interest rates, new annual fees and lowered credit lines for a lot of loyal customers — a recurring theme of the discussion is that consumers will end up punishing themselves by closing their credit-card accounts in a fit of anger. As one reader of a post about credit-card fees commented last week,

I think that the system of credit scoring needs to be addressed. The banks and credit card companies are abusing the current scoring system. They know that that if the account is closed the consumers score will go down and that is something the consumer will not want.

After all, these scores are used not only by lenders to determine whether they’ll front you money and how much interest they’ll charge, but also by a lot of other people who want some insight into your trustworthiness: Auto-insurance companies, for starters. Potential landlords. Companies thinking about hiring you.

But is this a real problem?

Will indeed your credit score drop if you tell your card issuer to stick their plastic somewhere other than an ATM? Part of the problem is that the methodology of determining your credit score is a secret formula held by FICO, a.k.a. Fair Isaac, the company behind the most widely-used credit scoring system in the US. Yes, they do explain the ingredients of that formula in general terms. Getting the nitty-gritty numbers, however, is like asking Coca-Cola for their secret recipe: They’ll admit it contains “natural flavors,” but don’t expect much more information than that.

Yet FICO was able to shed some light on the question. The most important point made by spokesman Craig Watts is that it’s a myth that if you close a credit-card account, all trace of it disappears from your credit score. In fact, he says, the credit agencies from which FICO draws information used to calculate your score hold on to payment history for years — the positive stuff for about a decade and the negative stuff usually for seven years. That information is used to calculate two parts of your credit score. One is payment history, which accounts for 35% of your score and which reflects, among other things, whether you made your payments on time and whether you welshed on any balance you may have owed when you chopped up your card. Another is length of credit history, accounting for 15% of your score, which reflects whether you’re a newcomer to paying people back or not. All that stays, Watts says, if your card goes. You’ve read — perhaps from well-meaning people on FICO’s own message boards — that you should never close your oldest credit card because your length-of-credit-history measurement will immediately plummet? Again, that’s a myth, says Watts. (Dropping it might affect your credit score a decade from now, he grants, but the impact will be small potatoes compared to that of your credit-related behavior in the interim.)

Where you may get into trouble right now is in the “amounts owed” area, which accounts for another 30% of your score. One important element of that is what’s called credit-card utilization — that is, the size of the balances you carry on your credit cards as a percentage of the amount you could theoretically borrow on all your cards. Imagine, for example, that you have two credit cards with $5,000 limits on each, with a $500 balance on one and a zero balance on the other. If you close the zero-balance account, you’ve gone from using 5% of your available credit (the $10,000 total on your cards) to 10% (of the $5,000 on the remaining card) — not a big deal in credit-card terms. In low-utilization situations such as that, closing an account should have virtually no effect on your credit score, says Watts. “No harm, no foul,” he says.

But let’s say instead that you have three $5,000-limit cards — one with a $3,000 balance and the others with none — and you drop your two zero-balance cards. In this case, your credit-card utilization rate will go from 20% to 60% — a noticeable amount that will certainly ding your credit score. How much? Can’t say, since we’re back to the black-box credit-scoring system.

In any case, Watts says that if you already have a score in the upper half of the 700s or above — that’s about 40% of the population — losing a few points shouldn’t hurt you at all, practically speaking.

So if you want to chop up your credit card, start chopping. The downside is probably a lot smaller than you think.

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MONEY

More Money Wednesday Roundup: Wealthiest Religions & Google’s Guide to Credit Cards

Personal finance from around the Web:

  • You’ve probably compared incomes using every other variable in the book. What about religion? Here’s the breakdown of finance by faith. See which religions are America’s most affluent. [Good]
  • Google is testing an online credit card comparison tool. But don’t get too excited. You can only be a trial run guinea pig if you live in the UK. [Pocket-lint]

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MONEY

Mad Credit-Card Users Aren’t Taking It Anymore

It’s a big day for consumers: Sweeping reforms regulating the credit-card industry go into effect today. Among them: Your card issuer won’t be able to increase the interest rate on an existing balance or charge you fees for over-the-limit transactions without your permission. (The Fed summarizes the changes here.) All major victories for cardholders.

But if you think the world of credit cards is going to be all rainbows and unicorns now, think again.

Banking analyst Ron Shevlin summed it up nicely on American Public Media’s Marketplace show Monday morning:

I would characterize what the future’s going to look like here is the airlinification of the credit card industry. They’ve kind of nickeled and dimed consumers to death.

Airlinification, indeed.

If buying an airline ticket was ever a pleasant experience, it’s hard to remember — because now, it’s fraught with a bevy of increasing fees, poor customer service and a general feeling that airlines have nothing better to do than to come up with creative ways to break into your wallet. (Want to check a bag? It’ll cost you. Paying that fee at the airport? It’ll cost you even more. Need a blanket on your flight? You got it — after you pay 8 bucks.)

So that not-so-warm, not-so-fuzzy feeling you get when dealing with the airlines? Prepare to experience it (even more) with your credit card issuer. Let’s face it: The relationship between cardholders and their banks was never all that great. But now, I have a feeling it’s going to be downright hostile. Card issuers are finding ways to get around the new rules by setting all sorts of new traps. And I don’t think there’s any end in sight.

Last week, I wrote about how one issuer, Citibank, is imposing a new annual fee on some of its cardholders (myself included). And judging by your comments, the frustration is reaching a fever pitch. Paula from Los Angeles wrote:

Screw the customer any way you can is the credit card companies’ motto these days.

Added David from Watson, Oklahoma:

We all need to find ways to hit the banks where it really hurts. They make a small fortune on their cards already. I’m also sick of hearing them snivel about their credit losses. Give me a break!! Who bombarded every warm-bodied American with credit offers? It certainly wasn’t me, and I should not have to pay “for their increase in the cost of doing business” now. They can well afford to pay for their own misdeeds.

Paula and David are not alone. That’s just a sampling of the frustrated and angry comments we received — on just one bank’s new fee.

So can anything be done? In this month’s MONEY I wrote a piece on how you can spring yourself from these credit card traps: By dumping your big bank and going with a smaller issuer or credit union instead. That’s because these issuers are more likely to be focused on the customer relationship and less on the bottom line. Remember, there’s still one major difference between banks and airlines: When you need to fly from Point A to Point B, you often don’t have a huge number of carriers to choose from. But credit-card issuers? They’re as plentiful as stars in the sky.

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MONEY

More Money Friday Roundup: Capital One Reimburses Fees & Paying with Privacy

Personal finance from around the Web:

  • Social networking is free, right? One writer argues that we pay with privacy in order to enjoy the perks of sites like Gmail and Facebook. [Newsweek]
MONEY

More Money Thursday Roundup: Avoiding an Audit & Online Shopping Shortcuts

  • The new credit card rules take effect on Monday. So the White House is hosting a live town hall at 2 p.m. EST with economic adviser Austin Goolsbee, who will answer your questions about the reforms. [CreditCards.com]
  • Online shopping is even better if you know the best tricks. Use search engines like Google, Bing and Yahoo! for some shopping shortcuts. [Shopping Journal]

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MONEY

The Onslaught of New Credit Card Fees Begins

The bulk of the CARD Act goes into effect on Monday–and the industry backlash is well under way.

Last summer, Citibank started testing a new annual fee for some of its cardholders: Customers would have to pay anywhere from $30 to $90 a year for the privilege of using their Citi credit cards. If they charged $2,400 a year on their card, the fee would be refunded.

It looks like the tests went well (for Citi, at least).

This weekend, I received this letter, dated Feb. 13, regarding my PremierPass MasterCard:

We’re writing to let you know about an important change we’re making to your account. Effective April 1, 2010, an annual fee of $60 is being added.

The reason we are making this change is to maintain the quality of our service and the rising cost of doing business. However, because we value you as a customer, we wanted to give you an opportunity to have the annual fee credited back to your account.

Here’s how it works. Each year, we’ll credit the $60 fee back to your account once you have made $2,400 in purchases during that year. That comes to an average of $200 in spending a month, an amount you can reach by using your card for purchases you already make, like gas, groceries, cell phone plans or your cable bill.

As always, you have the right to opt out of this change and close your account. Please read the Notice of Change in Terms and Right to Opt Out beginning on the back of this letter so you are fully aware of all your account changes. If you have questions, call 1-866-915-9425.

Customers who choose to close their accounts but still carry a balance will be able to pay off the debt at their current rate. It’s unclear how many customers are targeted by these letters, but the decisions are based on individual customers’ credit history and performance with Citibank.

Now, I don’t charge $2,400 to this card each year (I get better cash back rewards with another bank), but I do use it enough to keep it active. Guess that wasn’t good enough. It certainly wouldn’t break my heart to cancel the account–but doing so will cause my credit score to dip a little bit (I’ll have less credit available to me, increasing my debt to credit ratio–a factor that impacts credit scores).

So I called customer service to see if I could get myself out of the fee. The rep who took my call at first reiterated the letter–that I could get the fee credited back to me by spending an average of $200 a month with the card. But then I explained that if that was the case, I’d probably want to cancel the card–and wasn’t there a way to get out of it altogether? I was told that he couldn’t reverse the fee right now–since I hadn’t been charged it yet–but that when it actually appears on my statement, I can call back to get it reversed. I was a little skeptical, but the rep said that he looked at my history and I seem to be a good customer, so it shouldn’t be a problem. (He did imply that I was probably targeted because my annual spending on the card was low.) He even gave me his ID number as some sort of confirmation. I ended the call without canceling my account, but I’m not sure what to do just yet. What if I don’t opt out before the March 31 deadline hoping for a reversal–and get stuck with the $60 fee?

Citi spokesperson Samuel Wang had this to say about the new charge: “We understand that customers can be frustrated by new fees, especially in difficult economic times. However, this action is necessary given the increasing costs of doing business. We also recognize that customers are frustrated by complicated notices and a perceived lack of options. That’s why we are taking a very different approach than others in the industry by communicating these changes in a clear way and providing customers with greater choice and more control. Customers have the opportunity to have the annual fee credited back to their account by using their cards for the purchases they may already make on a regular basis. As before, every customer has the choice to opt out and pay off the existing balances over time at their current rates and fees.”

But when asked whether a customer can ask for the fee to be reversed, Wang responded that the customer should opt out of the card, pay down the debt and close out the account.

So what should I do? Close now, or try to wriggle out of the fee later? It’s clear major card issuers are clamping down on cardholders (like me) who don’t generate as much profit for them. Since I don’t carry a balance or incur late fees, I’m basically getting an interest-free loan when I use my card. Still, every time I swipe, I generate merchant fees for the bank. But apparently I’m not doing it enough to make it worthwhile for Citi (thus the annual-fee-or-spend-more gambit). I do suspect that if I call to ask for the fee to be reversed, the service rep might grant my request because I still am a pretty good customer and not much of a credit risk to them. Of course, the party line at Citi is to not even try.

I’ll hang onto my card for now and think about it. But I better get used to these kinds of letters from my card issuers. Because I think the changes have just begun.

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MONEY

More Money Friday Roundup: ETF Hazards & When Not to Tip

Personal finance from around the Web:

  • Exchange-traded funds are all the rage these days, but are they right for you? Here’s a primer on perks and pitfalls of ETFs. [USA Today]
  • If your teenager is more worried about the latest Twilight movie than her latest bank statement, she might need some credit guidance. Here are some tips to help your teen become credit savvy before the balances accumulate. [Wise Bread]

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MONEY

More Money Thursday Roundup: Text Your Health Questions & Pay Taxes on Unemployment

Personal finance from around the Web:

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