You’ve probably heard about new debit card fees banks are charging or planning to charge their customers for debit card use.  Bank of America is leading the pack with plans for charging customers $5 a month for debit card use anyplace other than the ATM.  Other banks are predicted to follow suit – but why the sudden increase in fees?

The Durbin Amendment

Durbin Amendment is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and went into effect on October 1^st.  It changes the limit of swipe fees banks charge merchants when they accept debit cards as payment instead of cash.  Previously, banks could charge merchants up to 45 cents per debit card transaction; but The Durbin Amendment currently limits the swipe fee to about 22 cents per transaction.

Bank Response to Debit Card Fee Swipe Limits

Banks felt this change would cause them to lose 50% of their revenue from debit card transactions, and began looking for ways to recover from that loss of income.  Bank of America intends to add the $5 monthly debit card fee, but other banks are talking about changes to checking accounts and debit card rewards programs in an effort to recover their lost revenue. 

According to research conducted by MyBankTracker.com on the changes to debit card rewards programs, the following banks reported:

• Chase Bank: ending the rewards program it maintains with Continental Airlines
• Bank of America: no changes to the US Airways rewards program  
• Wells Fargo: ended new enrollments to their rewards program on March 20^th
• Wachovia: ended program March 27^th
• Citigroup: ended rewards program enrollments on June 10^th
• JPMorgan Chase & Co: ended enrollments on July 20^th

What Should You Do About Bank Changes?

Take a look at how your current bank is responding to The Durbin Amendment.  Will they keep their reward programs for checking accounts and debit card use or are they canceling them? 

Change banks: If you currently have a free checking account with a debit card you use frequently and your bank is looking to add a monthly debit card use fee and/or cancel the rewards program – you may want to consider looking at a smaller bank or a credit union.  Many online banks are not reacting to the changes and will continue offering debit cards for free.

Stop using debit card: Alternatively, you can continue with your existing bank even if they charge a debit card fee and simply stop using your debit card for making a purchase.  Write a check instead.  Consider using a credit card for each individual purchase throughout the month and then pay it off in full when the statement comes – or send your credit card account extra money to get a ‘credit balance’, and use your credit card like a debit card. (When the money is gone, stop spending until you send more!)

Debbie Dragon is a financial writer for MyBankTracker.com, a site that helps consumers compare savings accounts, CD rates, and home equity loans to make informed banking decisions and save money.

Obviously, recent legislation (Dodd-Frank) played its part in motivating banks to add new fees, but since we can vote with our feet (and our dollars), I think it is time to look at alternatives to large banks.

For some reason, and who knows why, there is a sector of banking institutions that just can’t get the love and respect they deserve – credit unions. In the past, you used to have to meet a specific criteria in order to be a member, but now the membership requirements are about as strict as, “you have to drive by our branch at least once a year.”

I’ve been a member of a credit union for nearly 15 years now – since I was old enough to join one based on my grandfather’s decades-long membership during and after his service in the Marines.

I’ve financed vehicles (back when I used to do that) through my credit union at incredibly low rates. I have enjoyed higher yields on CDs and money market accounts, and even turned to them for a mortgage – mostly because they were so easy to deal with and the rates were competitive. I still maintain a local bank account with a small, regional bank, mostly for convenience, but I do all “serious” banking with my credit union.

Some credit unions have more strict criteria based on geography, membership to a particular organization, employer-based, etc. However, chances are virtually anyone can now join a credit union – and here’s why they often make for the best personal bank account.

Four Reasons to Choose Credit Unions Over Big Banks

1. Free Checking. Fat chance of finding a bank that has totally free checking these days. Although there are crafty ways of avoiding checking account fees, no bank is going to tell you that. Most credit unions still have totally free checking account for members.

2. Free ATMs. Most credit unions belong to networks within the National Credit Union Administration or NCUA. If you go to any credit union that is part of this group, you will often receive no fee ATM transactions. It doesn’t always work out like that, but even if you do pay a fee, it’s going to be a lot cheaper than traditional bank fees.

3. Better Interest Rates. Credit unions are non-profit. When you join a credit union you have to pay in to it as a shareholder. It’s only about $5 that you pay as your “share,” but that $5 makes you an owner of the credit union and because of that, you’re entitled to benefits. Credit unions often have better rates on loans, and better interest rates on deposit accounts.

4. No Strange Fees. If you’ve taken a large amount of cash in to a bank lately, you’ll notice that they charge you for the deposit. Isn’t that kind like McDonalds charging you to purchase lunch, and then charging you for the food? If it seems silly, it is, but that’s the new normal with banks. Credit unions have also been affected by legislation and have beginning to hop on to the fee bandwagon, but not with outlandish fees like this.

Potential Drawbacks to Using a Credit Union

If you’re a “techno banker,” credit unions may not be your cup of tea. Their internet banking platforms aren’t nearly as robust as traditional banks, and you may feel like you’re looking at one of those old school blue screens when using them. They also don’t come with all of the transfer capabilities or other advanced online management tools.

Still, if you’re fed up with the big banks, there’s an option, and that option is the credit unions. I would encourage you to head over to the NCUA website today and find your nearest credit union to investigate their offerings and strongly consider making the switch.

How have your experiences with credit unions differed from those with a big bank?

Virtually overnight Lehman Brothers went from a healthy, thriving financial institution to a bank wiped off the financial map.

Before discussing Bank of America’s problems specifically, it is important to remember that your money on deposit is safe even if Bank of America ceases to operate. In the United States, The Federal Deposit Insurance Corporation, or FDIC, insures your account up to $250,000. The process to reclaim your assets may be frustrating, but in the end you won’t lose anything.

What’s Going on with Bank of America?

Bank of America has its financial hand in 99% of the 100 largest companies in America, as well as other companies in 149 other countries outside of the United States. It holds 12.2% of all deposits in America, and it is the largest bank by holdings, serving 57 million customers. If your money isn’t at Bank of America, you probably know one of their customers.

Banks make profits by not only lending money to you and charging interest, but they also invest the money that you ask them to hold in the form of deposits. They purchase companies, other loan portfolios, and they lend money to other banks and corporations at wholesale rates using complicated means like commercial paper and the money market – special markets only available to large net worth companies and financial institutions.

One company they purchased, Countrywide Financial, held the mortgages of 20% of all Americans. When the housing market lost a significant amount of value, Countrywide Financial was left with a huge amount of unpaid mortgages, which continues to weigh on Bank of America.

Adding insult to injury, a series of lawsuits has made investors worried and when lawsuits start, they have a way of multiplying. Not only is there the multibillion dollar robosigning lawsuit, where allegedly false information was being provided to judges in order to simplify foreclosure cases, an employee was awarded nearly $1 million for being fired for telling authorities about illegal practices at Countrywide Financial.

Every investor knows that fear is contagious and that, according to some, is what is causing Bank of America to continue the downward trend in its stock price. In fact, they have lost well over 50% of their market value.

As a way to put investors at ease and reduce the size of their footprint on the world’s financial markets, Bank of America continues to sell assets that they own as well as lay off employees. Recently BOA announced that 30,000 would lose their jobs as restructuring continued, but this may backfire as investors grow worried that the bank may not have as much money as they claim.

On the other hand, despite government claims to the contrary, Bank of America probably is “too big to fail.” If they were to close their doors, the American banking system would have a difficult time handling the shock, and for that reason, the government probably wouldn’t let that happen.

Bottom Line

Unlike 2008, banks as a whole are in somewhat better shape, and they are still the best place to put your money that you don’t want to expose to risk of the stock market. Even though that savings account isn’t going to make you much more than 1% per year, depositing your money into any of the major banks comes with free insurance from the FDIC. And some growth is better than no growth, considering the high likelihood of increased inflation.

Personally, I bank with a small, regional bank and a well-known credit union. I prefer to avoid the large banks, not so much because of instability, but because I don’t like their customer no-service policies.

News broke a couple weeks ago that Capital One has acquired ING Direct. I cringed. I had a Capital One credit card back in my spendthrift days, and after many problems with their lack of customer service, I decided to mail them their card back…in pieces.

It might be a bit premature to expect that same level of customer no-service for their former ING Direct customers, but I’m not going to stick around and find out.

The PerkStreet Financial^SM Checking Account With Rewards

Over the last several months I’ve been hearing good things from fellow bloggers about PerkStreet Financial. Over the weekend, I decided to give them a shot, and plan to move part of our tri-level emergency fund there, as well as our sinking fund balances (I’ll just keep the balances separate in a spreadsheet, since it looks like the sub-account feature may not be an option).

One of the most impressive offerings at PerkStreet is a 2% unlimited cash rebate on purchases for your first 3 months (and longer, if you maintain more than a $5,000 balance). If you keep less than $5,000 on hand, they will still give you 1% cash back after the initial offering.

Throughout the year, they also offer 5% (with a $250 annual limit) on various categories and retailers. That’s a fairly generous offering for a checking account!

We currently use one credit card for similar rewards,  but even they aren’t as generous. I’ve always felt a little conflicted about using a credit card for paying household utilities and the like, so if I can move these expenses over to the The PerkStreet Financial^SM Debit MasterCard^®, and earn an even higher cash rebate, well that sounds even sweeter.

I’ll probably have some of my regular paycheck deposited at PerkStreet to cover our regular, recurring household bills (utilities, Netflix subscription, etc), and run those charges through their debit card. Might as well earn some cash back on things I’m already paying.

Applying for an account was simple – just the standard contact information. You can fund your account using your existing checking account or a credit or debit card.

If you are interested, here’s more information from PerkStreet on their checking account offering:

Lending Club (9.65%)

If you have a slightly stronger stomach for risk, and like to have more control over exactly what your investment dollars are in, give Lending Club a try. I have a small portfolio of loans there earning about 10.90%. Read more about my experience in of my recent Lending Club reviews.

Smarty Pig Savings Account (2.15% APY)

Smarty Pig has revolutionized online savings by combining aspects of online banking and social networking. Well, that is, if you want your banking to be social (you can opt not to share info or accept contributions). One of the options you have with your Smarty Pig online savings account is the ability to receive “contributions” from your friends and family. For instance, let’s say you are heading off to school and need some help buying books. You could create a “Textbooks” goal and choose to accept contributions. Friends and family could “feed your piggy” ever so often without having to send you cash directly. It’s a great concept, and a great rate, too!

ING Direct (1.10% APY)

We still have a number of sinking funds at ING Direct. They are not earning a lot of interest, but I’ve yet to find an easier interface to navigate saving in multiple accounts, creating automatic contribution plans, etc. I guess I’m willing to sacrifice a couple tenths of a percentage points for ease of use with these designated savings accounts.

Ally Bank (1.29% APY)

Ally Bank has always intrigued me, and not just because of their cute commercials starring those kids with puzzled looks on their faces. Kiplinger’s Personal Finance magazine (my favorite money magazine) declared their online savings account the “best savings account” in their December 2009 review. I also closely follow their high-yield CD rates, no-penalty CDs, etc.

Local Money Market Accounts

In addition to these online savings accounts, don’t forget to check out your local bank or credit union. Often times, these smaller institutions will run some nice incentives, particularly if you have a good amount of money saved (like a six-month emergency fund).

Our local bank recently had a 6-month promotion on their money market account – offering 2.25% APY on balances over $2,500. The promotion was so successful, they continued it for another six months.

*Rates current as of 08/03/2010 and are subject to change

However, there are good reasons to keep at least one bank account, and one credit card, that you don’t use often for physical transactions. These two tools make up your personal finance firewall, and provide a layer of protection between you and those trying to separate you from your money.

I first heard of a bank firewall account from Jim at Bargaineering. Since, like him, I complete a number of transactions online each month, I thought it sounded intriguing. I’ve implemented something similar in my own finance life, and even taken it a step or two further.

First, so you can get an idea where I’m headed with all this, check out the following video from Jim as he explains the concept of a bank firewall account. If the video doesn’t display for you, you may need to click through to the site to view the embedded video.

Jim Wang provides an excellent overview of the bank account firewalls concept.

Like Jim, I also think ING Direct is a great place to set up such an account because of their interface for transferring money, and the ease of creating multiple accounts. Of course, there are plenty of other top online banks to choose from.

Most fraudulent activity associated with vendors such as PayPal involves a thief obtaining the user name and password for a PayPal user’s account, and initiating withdrawals from the user’s primary bank account tied to that account. By only having one account associated with various online payment vendors, and keeping a very low balance in that account, you can minimize the amount of money exposed should your online payment account become compromised.

When the couple online deposits associated with business activities hit my bank firewall account I immediately initiate one transfer to my self employment tax sinking fund for roughly one-third of the gross amount. The remaining amount is transferred to my business checking account in the form of profit, from where I write myself a single check at the end of the month (after business expenses are paid) as sort of a bonus salary.

In addition to maintaining the firewall bank account for accepting electronic deposits, I also held onto a single low-interest, high-reward credit card to use specifically for making online purchases and regular monthly subscriptions or recurring bills (Netflix, cell phone bill, etc.). For these types of purchases, I prefer to use a credit card because I am exposing about 99% of the risk to the bank, rather than my personal bank account.

At the end of the month I receive a single statement for the credit card, review the list of transactions for accuracy, and make a single online payment to pay off the card. I choose to make the payment manually, because if fraudulent charges appeared and I did not yet have the transactions in dispute when the bill cycled, an automated payment for the full balance could easily wipe out my associated bank account.

Another benefit of using a single credit card is that I’m able to easily see a consolidated view of my recurring, monthly transactions. I like to play a little game each month and try to bring that total bill down as far as possible.

What extra service can I cut from our monthly routine? Which subscriptions are we just not fully utilizing? How can I shave more off my cell phone bill? The utility bill? It becomes a challenge each month to try to come in under the previous month, and having all the charges billed to a single card helps me see at a glance whether or not I’ve been successful.

If you work online, or receive online payments from a variety of sources, I’d encourage you to set up a bank firewall account to provide a buffer between you and your primary banking sources. Also, consider hanging onto one credit card once you are debt free, and simply running all recurring charges through the card. It makes for a simple billing process, and it allows you to play with house money, rather than your own.

From a recent Yahoo story:

Arthur Santa-Maria, a laid-off engineer who lives just outside Albuquerque, N.M., said he didn’t pay any fees the first time he was laid off, for several months in 2007. His unemployment benefits were paid by paper checks. He found a new job last year but was laid off again last fall.

This time, he was issued a Bank of American debit card — a “prepaid” card in industry lingo — but he was surprised to learn he had to pay fees to get his money. He asked the bank to waive them. It said no. That’s when Santa-Maria called back to ask how to check his account online. He logged on and saw that the call cost him a half dollar. To avoid more fees, Santa-Maria found a Bank of America ATM at a strip mall and withdrew $80 at no charge. When he got back to his car, he decided to take out the rest of his money — $250 — and deposit it in his bank account.

Afterward, Santa-Maria logged on to his account and saw a charge of $1.50 for two withdrawals in one day.

To play devil’s advocate, most banks do offer a free alternative to withdrawing unemployment benefits.  Customers may walk up to a teller and ask for a cash advance for the full amount on the card, and they should not be charged a fee.  The problem is most people are using the card like a debit card (after all, that is what it is marketed as) and making small purchases and withdrawals all along.

I am not totally against the idea of banks charging fees, after all there are costs associated with operating ATMs such as maintenance, and reconciliation of the funds.  However, it seems that an exception could be made in this case, especially since many banks recently received a portion of the billion dollar bailout!

With passage of the recent stimulus bill, unemployment benefits will receive a boost, which means banks will likely see an increase in the number and volume of these types of transactions.  I would like to see state governments work with both banks and consumers to find an alternative method of transferring money to benefits recipients. 

One idea would be to simply direct deposit the unemployment benefits to existing checking accounts where consumers bank.  Most recently-employed workers are probably familiar with this format anyway as they likely received paychecks via direct deposit before they were laid off.  This would be a more cost-effective method of transferring benefits than paper checks, and would allow unemployed workers to maintain their previous banking relationships and use existing debit cards and ATMs to access funds.

A Little Background

Hard to obtain all the details about the individual’s case in a five minute phone call, but here is a quick summary of the call.  According to the caller he owed about $5,000 on a credit card that was charged off a couple years ago.  Apparently, the creditor eventually got around to collecting (probably after they sold the debt for pennies on the dollar) and contacted him to work out a payment arrangement.

The caller agreed to send the collector $500 a month for 12 consecutive months to pay the debt off in full.  He faithfully sent along his payments for $500 each month, and at the end of the year he checked his statement and the outstanding balance was $5,400.  Apparently, the balance had actually gone up thanks to a 31% interest rate and various fees!  I’m not sure how accurate the guy’s numbers are, but his story serves as a great reminder for those dealing with collectors, or any creditor for that matter.

Always Check Your Statement

The caller’s story was troubling for a couple reasons.  First of all, if he could have scraped up a little cash (or already had some in savings) he could have probably settled the debt for a couple thousand dollars as settlement-in-full.  He should not have done anything without receiving the terms of the workout offer in writing from the collector.  And he definitely should have been checking his statement all along to make sure his payments were being correctly applied and his balance was reduced accordingly.

I can’t believe he actually waited a full year before checking, or requesting, an updated statement on his account.  Unfortunately, there are still a lot of people out there who trust banks and collection agencies explicitly.  The hard truth is that there are a number of unscrupulous agencies out there running around collecting old debt who use any number of tactics to separate you from your money.

I’m not telling you that every collector you come in contact with will lie to get money from you, but I am telling you 99% of them will. I know, I used to work in a call center environment (thankfully I didn’t have to do much collections, but I worked next to them).  It was common practice to use all sorts of pressure tactics to talk people into making payments over the phone, or give up details of their checking account for auto-drafts of their accounts.  The next call from that customer usually came to us in customer service–”Why did you guys wipe out my entire checking account, I only agreed to $25 a month?”

Of course, I had to tote the company line at the time, but secretly I wanted to tell these people, “They took out all of your money because they lied when they said they wouldn’t.”  Plain and simple.  So please, always get these work-out agreements in writing, and always keep up with your account statements to hold the collector accountable for following through on their end of the deal.

Unfortunately, I don’t have to worry about savings above $100,000 (yet).  For the amount we do have in emergency savings we keep up with our last statement just in case we are required to show proof of our account balance in the event of a bank shutdown or data loss.  In addition to the information savvy readers will share in the comments here, I recommend readers check out Trent’s recent post at The Simple Dollar, Will My Money Be Safe.  It provides a nice run down on the rules for various types of investments.

Here’s a copy of the message I received:

I just started a WaMu savings account for my growing emergency fund.  Now with the news they are next in line to be either bought out or bailed out should I be worried or moving my money?   I know my money is protected by the FDIC but I don’t want to go through any processes like that to get it back if something happens.  Should I just sit tight or should I be opening another account else where?

What advice do you have for this fellow reader?  Are you in a similar situation?

Defining Paycheck to Paycheck

I don’t know that an official definition of “living paycheck to paycheck” exists, but since I’ve been there myself I can sum it up by the example of checking your balance the day before payday and breathing a sigh of relief that you are not overdrawn, even though the $1.81 left in your checking account doesn’t leave much breathing room.  Your credit cards are nearly maxed out, you have nothing in an emergency fund, and your wallet is empty.  Kind of reminds me of my own soggy hotdog story.

The Numbers

The survey revealed some interesting statistics:

• 47% of workers live paycheck to paycheck to make ends meet
• 21% of those earning over $100,000 also live paycheck to paycheck
• 25% of all workers reported they save nothing each month
• 33% do not participate in any retirement programs (employer-sponsored or otherwise)

The numbers are telling.  One in four workers save $0 each month, either because they don’t have any additional money, or because they choose to spend it.  While there are a few in the former category, I imagine a large percentage of those who save nothing could find something to save if they simply cut back on their lifestyle.  These folks probably pay for cable, have cell phones, go out to movies, drink beer or cigarettes, indulge in meals out, etc.  If only one or two items were cut from their monthly budget they could probably free up $50-$100 dollars to begin a savings program.

Start Saving, Something

I personally know several people who save nothing because the amount they have to save is perceived to be so small that it couldn’t possibly make a difference.  Not true.  Even $20 a month adds up over time.  In just a few months you will have built a $100 cushion in your emergency fund.  Here are a couple ideas on how to start a savings program:

• Find one or two monthly expenses you can live without and eliminate them.
• Open a high-yield savings account.
• Set up an automatic transfer each month in the amount you saved by reducing monthly expenses.
• Find some creative ways to earn extra money (complete surveys, start a blog, work part time, etc.).
• Add to your savings any additional part-time earnings you generate.
• As you receive raises or bonuses at work, hold your lifestyle steady and increase the amount you save each month.

The point is to start saving something–any amount you can scrape together.  You don’t have to be saving half of your income for your savings plan to be worthwhile.  As your savings accumulate you will slowly become less dependent on a paycheck to pay your next bill.  Eventually, you may even have a month’s worth of expenses saved.  It’s been said that having money in the bank is the softest pillow of all, and I couldn’t agree more.  No more staying awake at night worrying about the power being cut off.  No more feelings of desperation when your kids are sick, but you can’t afford to get a prescription filled.  And best of all, no more soggy hotdogs for lunch!