Robert Kiyosaki Blog

Laura Rowley

Banks are squeezing customers with historically high fees and penalties, from overdraft charges to account service fees to new surcharges on foreign debit transactions.

But the pressures that have prompted the fee war with consumers started well before the financial meltdown, according to Jo Preuninger, a former management consultant who spent more than a decade in the consumer banking arena.

I asked Preuninger for a little history, as well as some of the tricks of the trade that banks would prefer to keep secret.

Secret #1: For many banks, the most profitable customers aren’t the mass affluent — they’re “Joe Lunchbox.”

In 1999, the Gramm-Leach-Bliley Act allowed banks, insurers and securities firms to merge, breaking down barriers that had been in place since the 1930s. Following the new law, “if you took all the (deposit) checks written for $10,000 and above, most were written to institutions such as Charles Schwab, Fidelity or Merrill Lynch,” says Preuninger. “They took the best customers. The banks were becoming more like Laundromats, where you put money in for a short period because you still needed to pay with a check or (get cash).”

At the same time, loans provided little profit as interest rates remained relatively low, prompting banks to seek consistent, non-interest income. “The focus was on how banks could not only identify fees they could charge, it was how to do a better job of collecting their fees,” says Preuninger.

Middle-income customers presented the greatest potential to harvest fees. “There’s certainly a customer segment that could be called ‘Joe Lunchbox,’ who expect to be nickeled and dimed,” says Preuninger. “They are managing money from paycheck to paycheck. It’s someone who would prefer to pay an overdraft fee to get their mortgage covered rather than get hit by a mortgage provider with a late fee and a ding on their credit score.”

Last year, overdraft and insufficient-funds charges totaled nearly $35 billion and comprised about 90 percent of banks’ consumer-fee income, according to a study by the consulting firm Bretton Woods Inc. Three-quarters of banks automatically enroll consumers in their “overdraft protection” programs without formal permission, and more than half of banks manipulate the order in which checks are cleared to trigger multiple overdraft fees, according to a Federal Deposit Insurance Corporation study.

“They are going to try to turn the best profit they can, which is why they post in the most attractive way they can while avoiding and minimizing legal exposure,” says Preuninger.

Someone who overdraws a checking account a few times a year should choose a bank with a program that makes it easy (and free) to shift funds from savings to checking to protect against overdrafts.

Secret #2: Banks hope frequent overdraft customers don’t understand the alternatives.

The banks deemed overdraft protection to be a customer service convenience that provides an alternative to payday lenders, says Preuninger. And yet some of those customers might almost fare better with loan sharks. The Bretton Woods study found 80 percent of overdraft fees are incurred by 20 million households, who paid an average of $1,374 in overdraft fees.

These customers should consider ditching traditional checking account in favor of a prepaid debit card, which typically cost $70 to $80 a year ($10 upfront with a $5 monthly fee). Users direct-deposit their paychecks onto the cards (the money is FDIC-insured) and can do point-of-sale transactions and pay bills online. There are no overdraft fees; the purchase is declined if the card is empty.

Secret #3: Those helpful new customer set-up kits, designed to make it easy to switch banks, also try to make the account “sticky.”

“I did a lot of work in customer attraction and retention,” says Preuninger. “The biggest barrier to new accounts was switching. There’s a higher tolerance; a bank may have a lot of long-term customers — that doesn’t mean they love (the service).”

Most banks have a kit to assist customers in switching services. But do it yourself instead. Enter your regular bills in the bank’s online billpay site, rather than signing up with each biller’s website. If your new banking relationship goes sour, the account is more transportable. You won’t have to log into a dozen different biller sites and change the account and routing numbers.

Secret #4: Long-term relationships matter.

“Know what you want in the way of a bank and stay as long as you can because tenure does matter,” Preuninger says. “If you’ve been with a bank three to five years, they treat you differently than if you are there six months. If you direct-deposit your paycheck and have a (savings) relationship, they think of you differently than if you have free checking with $100 in it. Tenure and relationship does matter.”

So if you incur the rare fee now and then, always call customer service and ask (politely) for it to be removed. Emphasize your long-term relationship with the bank and ask for a supervisor if the initial effort fails.

Most customers aren’t profitable until they’ve been with a bank a few years because of the high cost of customer acquisition — sales compensation to branch managers, IT infrastructure, documentation and account setup. “It’s a long time before they break even, especially if they goose it with $100 to you to open the account,” Preuninger says.

Secret #5: Banks want you to enjoy the “advantages” of paying with credit, debit, check and cash — because it will make you more likely to lose track of your money.

“One of most dangerous things going on with consumers is they are not paying attention to the variety of ways they are paying. They are balancing money back and forth because it’s too hard to account for,” Preuninger says. “If you pay seven different ways, you’ve just added complexity to your life. Consumers shouldn’t say to the bank ‘you’re responsible to tell me what I’m doing with my money.’”

But more banks are moving in that direction. PNC Bank, for instance, launched an account called Virtual Wallet that presents account information in calendar form, focused between today and the account holder’s next payday. A “danger day” appears on the calendar in red if the account is at risk of an overdraft. The user can either move bills later in the month, or shift money immediately from the savings portion of the account at no charge (the account does it automatically if the consumer doesn’t). Statements are only available online and the bank charges 50 cents per check for writing more than three a month.

Best bet? Simplify. Get a free checking account with no fees and a low minimum balance requirement, pay major household bills online, and then stick to cash. You’ll think twice about purchases, and avoid getting caught in the widening web of bank fees.

Read more from the original source:
Five Secrets Your Bank Doesn’t Want You to Know

Couples frequently avoid talking about money before marriage. That’s unfortunate, because sharing perspectives about money can help couples resolve the financial issues that doom many marriages.

The following financial compatibility quiz can help couples planning to tie the knot discuss financial issues. Answer “true” or “false” to each of the following statements.

1.      We are aware of and comfortable with each other’s money personalities.

2.      We have discussed our short- and long-term financial goals.

3.      My spouse and I are well versed in personal finance.

4.      My spouse and I have discussed a plan to structure our finances.

5.      We have planned for the impact that marriage will have on our taxes.

6.      We have decided how to divide up the money management tasks.

7.      We understand the importance of establishing a realistic budget.

8.      I know my future spouse’s investment personality and risk tolerance.

9.      I know how much debt my spouse is bringing into our marriage.

10.     We have made a commitment to discuss money regularly.

Answering “true” to eight or more statements indicates that you and your spouse are on your way to a stable financial future. However, it’s still a good idea to continue to communicate and work together.

If you answered “true” to between five and seven of the above statements, you and your spouse need to devote more time to planning your financial future together. With a little luck, you can achieve financial compatibility.

 If you answered true to fewer than five questions, don’t call off the wedding yet. Instead, make a sincere commitment to discuss these issues and consider meeting with an experienced financial planner who can help you start your marriage on firm financial footing.

 Read on to learn more about the importance of each question.

We are aware of and comfortable with each other’s money personalities.
Some of us grew up in families where parents watched every dime; in other families money flowed easily. Some people measure self worth in terms of money and possessions. Some people are natural spenders; others are savers. Understanding your future spouse’s background and values can help avert problems down the road.
 
We have discussed our short- and long-term financial goals.
Setting financial goals helps you develop priorities and define the type of lifestyle you will lead. Break down your goals into manageable pieces. If you want to buy a house in five years, determine how much you need to save monthly to meet the down payment.

My spouse and I are well versed in personal finance.
Parents and schools rarely provide training in personal finance. Work together to develop your financial knowledge and build confidence by taking a course, meeting with a financial planner, or purchasing a reputable book.

My spouse and I have discussed a plan to structure our finances.
Will you pool all your resources into joint accounts, maintain separate accounts, or devise some combination of the two? There is no right or wrong answer; the key is to come up with a plan that works for you both.

We have planned for the impact that marriage will have on our taxes.
The marriage “penalty” means that you and your spouse together are likely to pay more taxes than you each did as singles. Check with a CPA or tax professional to ensure that you are prepared to meet your tax responsibilities and aware of any tax law changes in this area.
 
We have decided how to divide the money management tasks.
Decide who will be responsible for balancing the checkbook, filing taxes, and tracking investments, or better yet, set up a plan for rotating these and other financial tasks.

We understand the importance of establishing a realistic budget.
Couples without a budget tend to live and spend from day-to-day. A valuable budget helps you save regularly, utilize income wisely, and avoid misunderstandings about how money is spent.

I know my future spouse’s investment personality and risk tolerance.
Investing styles are different, ranging from conservative to risky. Take the time to arrive at a level of risk where you both feel comfortable.

I know how much debt my spouse is bringing into our relationship.
Couples must enter marriage knowing how much debt they each carry and how it will be paid.

We have made a commitment to discuss money regularly.
Differences are inevitable. How you handle them is important to your marriage.
Whatever your answers, honest communication is the key to a lifetime of financial compatibility.

See the original post:
Couples Quiz: What’s Your Financial Compatibility

Jack M. Guttentag

As the unemployment rate rises, more mortgage borrowers must choose between default and making the payment out of savings. That can be an agonizing decision. See the letter below:

“I was laid off recently but am reasonably hopeful of finding another position soon… We have stayed current by drawing down our IRAs, but there is only about $4,000 left, enough to cover us for one more month…Our family is counseling us to keep the $4K left in our IRAs and not make the next monthly mortgage payments. Do you agree?”

Not making the payment will hurt your credit, but if the choice is between missing the payment this month and missing it next month, I would miss it this month and keep the cash. I would only use the rest of your cash to make the payment if you manage to get a job before 30 days after the payment due date. In that event, you have a reasonable hope of being able to work your way out of the jam you are in, so using your remaining money to save your credit makes sense.

This question is heavily value-laden, which is why I answered it in terms of what I would do, which is not necessarily what someone else with different values might elect to do. Some, especially investors, could take the position that a borrower is morally obliged to make the payment if there is any possible way to do it. This is a defensible argument, but it assumes that the borrower’s only duty is to the investor. The borrower in question has a family to consider as well.

The issue of a borrower’s obligation to continue making payments out of savings after their income-generating capacity has been impaired arises in connection with the government’s Home Affordability Modification Program. See another letter from a reader:

“I have applied to have my loan modified, and am in process of filling out the financial questionnaire that my servicer sent me. It asks for the amounts in my bank accounts. Although my income has dropped, I have enough money in the bank to cover the mortgage payment for three years. Should I take it out, and where should I put it?”

To be eligible to have your payment reduced under this program, you must document not only that your income is insufficient to meet the payment but also that you do not have “sufficient liquid assets” to make the payment. I have scrutinized the specs for this program issued by Treasury, and could not find a definition of either “sufficient” or “liquid assets.” It is a thorny issue that Treasury elected not to deal with. In effect, this leaves it up to the servicers to decide, raising the prospect of widely divergent approaches.

Don’t expect me to advise you on how to avoid the intent of this regulation, but I am willing to advise Treasury on how it might have created greater certainty in the rule by defining terms. I would define “liquid assets” as deposits without a specific term plus money market funds, and “sufficient” as an amount exceeding six months of payments.

My guess is that few if any borrowers are going to get caught by the “sufficient liquid assets” rule, that Treasury knows this and put the rule in to cover its backside. It does not want to read press reports about a borrower with millions in the bank successfully obtaining a rate reduction. If it happens, it can be blamed on the servicer. From this standpoint, leaving the rule undefined makes perfect sense.

More:
How Deep Must You Dig to Pay the Mortgage?

When Edward Miller recently applied for a Charles Schwab Corp. credit card, a company representative asked him to fax in copies of his bank-account statements to verify his net worth.

It was “a bit of a hassle,” says the 64-year-old retired economics and finance professor from Bethesda, Md. He complied and was eventually approved for the card with a $5,000 limit.

After years of mailing cards out to just about anybody, banks are suddenly freezing out all but the most creditworthy customers. Those who do get cards have to jump through more hoops, such as sending in copies of their pay stubs. And they’re being hit with higher rates and fees.

Banks always tighten credit standards in an economic slowdown. But the recently passed Credit Card Act of 2009 is forcing the industry to rewrite the play book it has used for years. The new legislation aims to limit fluctuating interest rates, ban some controversial practices and arm consumers with more information on their debts.

Banks have until February 2010 to comply with the act’s key provisions, although some parts of the law have earlier deadlines. Beginning in August, for example, issuers have to mail bills at least 21 days before the due date and provide at least 45 days’ notice before changing any significant terms on a card.

The result: Many banks are tightening things up now before many of the restrictions go into effect.

For consumers, the tougher underwriting standards by banks may seem like a pendulum shift back to an earlier era when credit cards sported annual fees and double-digit interest rates.

In recent years, issuers cast as wide a net as possible by offering credit to millions of customers, knowing they could always raise rates on those who turned out to be bad bets. That pricing flexibility helped firms rapidly expand their operations, as those with less-than-stellar credit many of whom carried a balance or paid late fees and penalty rates generated millions of dollars in revenue.

Now, the industry is scrambling to figure out who its new profitable customer is. “Without the ability to reprice customers, raise fees or rates, the old profitability calculation won’t apply,” says Alan Mattei, managing director at Novantas LLC, a bank consulting firm.

In recent months, banks including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., have raised interest rates and fees, switched customers with fixed rates to variable ones, and dropped credit lines and closed accounts. Credit Suisse Group’s Moshe Orenbuch expects credit-card balances could shrink by 10% to 15% through 2012 as banks drop their teaser-rate offers and cut back on offering credit to riskier customers.

Charles Crawford of Grand Prairie, Texas, says that Bank of America raised the interest rate on his $19,000 balance to 23.2% from 12.2% starting with his June statement, citing his high balances. Mr. Crawford says the move nearly doubled his monthly finance charges to about $420 from about $220. “I feel so upset with them that I was thinking about not paying them,” says the 58-year-old engineer.

Excerpt from:
Banks Get Picky in Doling Out Credit Cards

The Rich Dad Real Estate Summit 2009

• September 12-13, 2009
• Scottsdale Plaza Resort - Scottsdale, Arizona

How to find and analyze great investment opportunities in this economic climate.

Great investments are made when you buy…not sell. This is the time to be buying. To achieve success in real estate you have to know how to find great investments, analyze, finance, and manage property. That kind of knowledge isn’t inherent – it has to be learned. Develop your inner real estate genius at the Rich Dad Annual Real Estate Summit.

Regardless of whether you are an expert or just beginning in real estate, this event is for you. This event is exclusively designed for investors looking for long-term, positive cash flow.

Read the original here:
The Rich Dad Real Estate Summit 2009