One of the first topics we cover in my financial literacy class for teachers is bank accounts. Many participants later admit that they rolled their eyes a bit about this topic when they first saw it. Checking and savings accounts? What’s to learn? As it turns out, many of them learn enough to make them want to switch banks.
Many (most?) folks are using whatever bank they started with, sometimes because that’s the bank their parents used or sometimes because they got a free t-shirt or frisbee when they signed up in college. They really haven’t ever looked closely at what their bank offers or comparison shopped for what other banks offer. While this is not the financial decision that will have the largest impact on their overall financial well being, it is a fairly easy one to make and will make a meaningful difference.
The problem with many banks (and credit unions, but I’ll use “banks” to keep it simple) is a combination of paying very low (or no) interest on deposits and then charging fees for various “services.” Most folks just see this as the “cost of doing business” or, more likely, don’t really “see” it at all. While it’s true that banks need (and deserve) to make money for the services they provide, the question is how much do they need to make and do you really want to be leaving them a large tip on a monthly basis?
So what are the reasons people express for why they stick with their bank? Here are some of the ones I hear the most often in my class:
- “I’ve been with them for 20 years.” Okay, so inertia. Even the folks who say that realize this really isn’t a reason.
- “I also have credit cards and loans with them that I like and want to keep.” Well, first, very few banks require you to have a checking or savings account with them to get a credit card or a loan from them. And, second, you likely can get a better credit card and a better loan elsewhere.
- “Loyalty. I’ve been with them for 20 years and they’ve always been there for me.” This is one of the most interesting ones to me. While it’s true that they’ve “been there for you” for 20 years, that’s often because they have been profiting from you (taking advantage of you) for 20 years. And I’m curious whether these folks think the bank is going to be “loyal” to them? What do they think will happen if they go to their bank and say, “I’m having a bit of a rough spot. Is it okay if I stop paying on my credit cards and loans for the next year and you won’t charge me any interest or late fees?” “Sure!” Very unlikely.
- “Community. My bank sponsors the local Little League.” Okay, that’s fine, but what you need to realize is that they are not sponsoring the local Little League, you are. They are overcharging you for their services (especially by paying below-market interest rates), taking a small amount of that to donate to local organizations, and then the rest goes to their bottom line. Instead, you could take your business elsewhere and then write a check to your local Little League for half of what you come out ahead and both you and the Little League will be in better shape.
- “It’s too much of a hassle to switch.” Well, there’s pretty much no hassle to switch your savings account. There is some work involved to switch your checking account, maybe an hour or two (depending on how many autopays you have setup). But let’s say it takes you two hours to switch. Depending on how much you have in the bank, that could easily amount to a savings of $500 a year (or much, much more for folks with higher amounts in their savings), so that’s getting paid $250/hour for those two hours of work just for the first year. Given that you will continue to come out $500 ahead year after year, after ten years that works out to $2,500/hour. I think most folks would think that’s a pretty good hourly wage (and it goes up each and every year, all from that initial two hour investment).
So, let’s get into some specifics. How are these banks taking advantage of you?
- Well, first and foremost, many of them are paying below-market interest rates on your savings. Keep in mind that a major way that banks make money is that they loan your money out at higher interest rates than what they pay you on your deposits. The bigger the spread between what they loan it out for and what they pay you, the more money they make (with your money).
- Some banks still charge monthly fees (sometimes waived if you meet certain conditions, conditions that guarantee the bank is making money off of you in other ways).
- Some banks charge for overdraft fees, even if they electronically (and automatically) transfer the money from your savings accounts.
- Some banks charge when you order checks or a yearly fee to use their debit card.
I’ve toyed around with various analogies to try to effectively illustrate this. My latest tortured analogy is equating the interest rate that banks pay with the price of gasoline. Imagine there is an intersection where there is a gas station on each corner and this is where you usually stop for gas. (I hope many of you are no longer driving ICE vehicles, but I digress.) The four gas stations all sell the same gas and all offer the same “conveniences” of overpriced snacks, soft drinks, and cigarettes. But, interestingly, there is a fairly large deviation in the prices they charge per gallon of gas. (Interest rates as of 3/26/23, they can vary based on special offers and specific accounts or promotions.)
To be clear, I’m not suggesting that Ally is the only good choice, or even the best choice for everyone. But since I use Ally I know it works well, that they adjust their interest rates frequently to match market rates, and that they are constantly adding additional features and services. And they are almost undoubtedly better than the bank that most folks reading this post are currently using. Note that Ally also currently pays 0.1% on checking, so they pay more on checking than most banks are paying on savings. And they are offering an 11-month, no penalty CD for 4.75%.
But it’s even worse than this, because some of these “gas stations” also charge you extra if you want to put air in your tires (overdraft fee). Or use their windshield fluid and paper towels to clean your windshield (ordering checks or a debit card). Or even an entrance fee just to drive into their parking lot (account maintenance fees). And if interest rates continue to rise, Ally’s will rise with them, and these others will most likely stay at their current rates (so their gas gets even more expensive relative to Ally’s.)
And one more thing. The reason that Wells Fargo got top billing in the title of this post even though their interest rate, while still horrible, is marginally better than Bank of America or Chase, was because in addition to taking advantage of their customers financially, they are just a horrible company. They are racist, sexist, have defrauded their own customers, and push high fee products. (Other than that, they’re great!)
So, please, take a few minutes to evaluate your current bank and consider taking the time to switch. Even if you just can’t make yourself switch your checking account, at least get your savings account to a bank where it’s earning competitive interest rates (or even other possibilities for your savings).
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