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For more tales of financial frights, our Halloween special series, Avoid These 8 Investing Horror Shows, won't disappoint!
It's Saturday morning. As you slip outside to soak in some morning sun and sip coffee, you grab yesterday's unopened mail. Settling onto the porch swing, you toss aside the catalogs for later, pick up a familiar-looking item -- your monthly bank statement -- and run your thumb under the envelope's adhesive.
The birds go silent. The air turns thick. An unsettling din grows louder, as a fast-moving cloud engulfs you and just as quickly recedes.
When you come to, you're shaken, yet see no evidence of the invasion... until something in the corner of the porch catches your eye: the tattered carcass of your now-empty wallet.
No one is safe from the killer fees!
What happens when you poke the hive
Once upon a time (as in, up until earlier this year) banks relied heavily on fee income to keep their hives thriving. Then the Credit CARD Act was passed, clipping banks' wings, and taking the sting out of the amount in penalty fees they could extract from customers:
- Strict rules now limit how much and under what circumstances banks can raise interest rates on existing credit card clients. Plus, they have to give you 45 days' notice before they make any major changes to the terms of your relationship.
- Those insidious inactivity fees for cardholders who prefer to keep their plastic on deep-freeze have been mostly exterminated.
- The nectar of late payment fees has soured, now that there's a cap of $25 on what banks can charge tardy cardholders.
- And before banks can sting customers with overdraft fees, the institution must get your permission to cover -- aka cover and bill you for -- any shortfalls.
But you shouldn't discard your fee repellant just yet. The nightmare isn't over.
The new strain of fee infestations
The pestilence of penalty fees may be dying out, but another strain of fee income is squeezing through holes in the screen door of the new banking laws. Here are three of the most common new pests that might be jabbing away at your finances:
Bank service fees: Remember when banks dangled all sorts of freebies to woo you and your deposit dollars – free checking, free foreign ATM withdrawals, free money, free corporate-branded schwag? Now only those in the VIP seats get perks that were once gratis to everyone.
The biggies -- Bank of America (NYSE: BAC ) , Wells Fargo (NYSE: WFC ) , and early adopter Fifth Third Bancorp (Nasdaq: FITB ) -- have all reintroduced caveats (including minimum account balance and/or direct deposit requirements) to qualify for fee-free banking.
Financial sting: Fall short of any of these requirements, and say so long to free service. Instead, you'll get slapped with a bill for services rendered -- anywhere from $5 to $30 a month, depending on how many bells and whistles you have on your account. You can fight back by telling your big bank to take a hike.
Credit card annual fees: Back in the day (as in 2008), rare was the cardholder who had to pay for the privilege of carrying plastic. Ah, the good ol' days. Today, if you carry a card that pays you back in some way -- points, miles, cash back, free plushies -- watch out for the dreaded annual fee. That fee bite can quickly drain all the upside out of whatever reward you've been spending your way to earn.
Annual fees rake in revenue for banks. Just ask American Express (NYSE: AXP ) . It collects more than $2 billion in annual revenue -- much of which comes from annual dues that range from $95 up to $450.
Financial sting: Now everyone's getting in on the annual fee action: Capital One will double your reward miles for $59; JPMorgan Chase gives Sapphire cardholders more flexible travel rewards for $85. Both will waive the annual fee for the first year in the hopes that you'll probably be hooked (or forget to look closely for the charge on your one-year anniversary credit card statement).
Balance transfer fees: The final fee-generation strategy we'll cover in this article is an oldie and a goodie -- for banks' bottom lines. Let's call it The Bait-and-Bill: You get an offer in the mail inviting you to transfer a balance from another card to the new one, which offers a lower interest rate than you're paying now.
The math is irrefutable: My colleague Dan Caplinger showed how to save $2,000 a year on a $10,000 credit card balance by moving it from a card charging 20% interest to a "0% interest for one year" card.
Financial sting: The coast seems clear … until you open that familiar-looking envelope, and out wafts a $300 to $500 surprise -- a balance transfer fee based on a percentage of the amount of money you rolled onto the new card. Ouch. That's gonna leave a mark. Next time, win the balance-transfer game by following these tips.
The best repellant for any fee infestation is to read the fine print. With any particular service provider, think through your particular savings, charging, or transferring scenario from start to finish. Otherwise, you might end up seriously stung.
Looking for additional scary stories? We've got what you need in our Halloween special series, Avoid These 8 Investing Horror Shows.