Proposed rules take aim at abusive credit card and bank practices

Federal banking regulators this week proposed new rules to end some of the most criticized practices consumers face when they use their credit cards or overdraw their bank accounts.

The proposal, adopted by the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration is headed for a 75-day public comment, after which it could be modified. You can read a 2-page summary or the 269-page full proposal online. (Start on page 153 to see the actual rule.)

Among the changes, the new rules would:

• Force card issuers to give consumers a reasonable time, such as 21 days (including mail time), to make a payment before imposing late charges and other penalties.
• Limit the practice of applying payments to the lowest-rate portion of a multi-rate balance, such as the 0 percent portion balance instead of a 21 percent cash advance portion.
• Prohibit issuers from raising rates on existing balances, unless there is a variable rate, a promotional rate that is lost or expires, or a cardholder's payment is delinquent for at least 30 days.
• Eliminate the two-cycle method of calculating interest rates, which can penalize cardholders who occasionally carry a balance.
• Stop issuers from charging credit card account fees or security deposits if those fees or deposits would use up the majority of the available credit limit. Fees that exceed 25 percent of the credit limit would have to be spread over a year instead of being charged as a lump sum at the account opening.
• Prevent issuers from charging over-limit fees when a retailer's hold is the only reason the consumer exceeded the limit. Gas stations, hotels, restaurants, car rental companies, among other retailers, often place a hold on a portion of the credit line in anticipation of how much consumers may charge after, for example, completing use of a rental car or a hotel stay. Those holds can take days to disappear, causing consumers to unwittingly exceed their credit limits.
• Prohibit banks from charging a fee after paying an overdraft unless they have first given customers a chance to opt-out of overdraft payments. The rule would apply to any transaction that causes the overdraft, including use of checks, debits card, ATM withdrawals, and recurring payments.

The proposal drew praise from consumer advocacy organizations, including Consumers Union, which has long been calling for credit card reform. However, the organization issued a statement that said the rules need to go further.--Anthony Giorgianni

Safety nets offer financial protection in turbulent times

Many financial institutions are feeling the pinch of the credit crunch brought on by the subprime mortgage mess. If worry over the safety of your savings and investments is keeping you up at night, take heart. There are several government safety nets that can help if your money is threatened by a financial institution's insolvency. Here are some of those programs, along with their benefits and limitations.

Banks and thrifts. The Federal Deposit Insurance Corp. provides individuals at least $100,000 in basic coverage per institution. For many retirement accounts, including all IRAs and self-directed defined contribution plan accounts, the coverage is $250,000. Coverage limits for joint and trust accounts are a bit more complicated. FDIC insurance does not apply to safety deposit box contents or to mutual funds and other securities and insurance sold by banks.

Federal and some state-chartered credit unions. Insurance from the National Credit Union Administration generally is the same as for banks and thrifts, though there are some differences. Some NCUA-insured credit unions buy excess share insurance from American Share Insurance that covers every account for an additional $250,000. That coverage is not government-backed.

Non-NCUA-insured state-chartered credit unions. Some states allow state-chartered credit unions to forego government-backed insurance and opt instead for primary share coverage from American Share Insurance.The insurance provides $250,000 protection for every account. About 5 percent of state-chartered credit unions take this coverage.

Broker-dealers. The Securities Investor Protection Corp. provides each investor with $500,000 protection to recover missing assets, of which $100,000 may be based upon a claim for cash, if a brokerage firm closes or becomes insolvent. In most cases, the SIPC replaces existing securities. It doesn't cover market-related losses or losses due to investment fraud; nor does it cover non-members, even if they are affiliates of SIPC members. Click here for more information.

Defined-benefit pension plans. The federal Pension Benefit Guaranty Corp. covers workers with traditional defined-benefit retirement plans, the kind that provides a set income stream or a lump-sum benefit in retirement. Coverage limits are set yearly and vary by circumstances, such as a worker’s age on the date the retirement plan was terminated or went into bankruptcy. The fund does not cover plans created by the government, church groups, or small professional service employers such as doctors and lawyers.

Defined-contribution plans.  There’s no guaranty fund to cover 401(k)s and other defined-contribution plans, although retirement money invested in banks, thrifts, credit unions, and brokerage firms may be protected by the programs that apply to those institutions.

Insurance. Many insurance products, including fixed-rate annuities and life policies, are protected by a variety of state guaranty associations funded by the insurance industry. Coverage varies by state. The National Organization of Life and Health Insurance Guaranty Associations offers information about your state’s life and health guaranty programs.  Similarly, the National Conference of Insurance Guaranty Funds provides details about guaranty programs for property and casualty coverage.—Anthony Giorgianni

Stupid bank tricks

Anyone who despairs over the current state of American ingenuity might take some comfort in a new report from the U.S. Government Accountability Office. The GAO report shows that the banking industry today is nothing if not creative in thinking up fees to stick us with.

The report focuses largely on overdraft fees, which have become a major source of revenue for banks, as well as a big annoyance for consumers. The average overdraft fee, according to the report, is now about $28.

At the same time, some banks are making it remarkably easy to overdraw. One way is by letting debit card transactions go through even if there isn’t money in the account to cover them. We covered that in a recent article in the Consumer Reports Money Adviser newsletter.

The GAO also notes that while electronic payments, such as debits, are processed virtually instantaneously, banks are allowed up to 11 days to process non-local paper checks. As a result, depositors can easily incur overdraft fees even though they think they have ample money in their accounts. 

What’s more, the GAO found, some banks process debits not in the order they occur but by size, starting with the biggest.

Say you have $1,000 in your account and make a series of debit transactions in this order: $25, $300, $10, and $750. Only that last $750 charge will have put you over the limit of your account (in this case, by $85). You might think you’d incur one overdraft fee.

But nooooooo……

If the bank reorders your debits as: $750, $300, $25, and $10, you’ll be overdrawn as of the second transaction and face three overdraft fees.

Lessons here: Keep an eye on your account balances, use that debit card with care, and if your bank starts pulling stuff on you, consider taking your business elsewhere. There are still plenty of banks to choose from. Our last survey of banks showed high levels of consumer satisfaction with many financial institutions. (The report on our survey is free, but the ratings are available to our subscribers only.)

Debit users say the PIN is mightier

Further evidence that consumers are pretty smart comes from a new survey by the research firm Gartner. It found that most debit-card users would rather punch in a PIN to make a supermarket purchase than sign a payment receipt. This is despite the push many banks have made to get consumers to sign (which rewards the bank with higher transaction fees).

But signing puts you at greater risk of identity theft and, under federal law, your liability for fraudulent charges on a debit card can be greater than for a credit card. This recent article from the Consumer Reports Money Adviser newsletter offers tips on how to avoid high overdraft fees and other bad stuff when using your debit card. 

Incidentally, the Gartner survey showed one payment method consumers preferred even over the debit/PIN combo. That was paying with cash.

And if you thought you hated telemarketers before...

Here’s another reason to be wary: Crooked telemarketers are using an obscure financial instrument known as a demand draft or remotely created check to steal money from unwary consumers’ checking accounts. This article on the Daily Dollar, a Consumers Union blog on money issues, explains how the scam works.

How can you protect yourself, aside from never answering the phone? The Daily Dollar offers this advice: “[R]ead your bank statements carefully and report and dispute any error, no matter how small. Thieves sometimes put through a small charge first, and if that works, try again with a larger charge, or put the same charge through to your account every month. If you aren’t happy with how your bank responds, file a complaint at: www.helpwithmybank.gov."

For more information on where to complain, depending on where you bank, click here.

Q&A: Extra FDIC protection for trust accounts?

Q. Is it true that a bank CD that is in trust for children will be protected if the bank fails, even if the amount in the CD is over the FDIC limit?

A. Sometimes. Payable-on-death (POD)  accounts, such as bank CDs or other accounts in trust for a named beneficiary, can be insured over the $100,000 Federal Deposit Insurance Corp. limit, depending on the number of beneficiaries and the amount of the CDs.

"For PODs, each qualified beneficiary is insured up to $100,000," says David Barr,
a spokesman for the FDIC. "So if you have two children, you are covered for $200,000. If you have three children, the coverage is $300,000." Qualified beneficiaries include children, parents, spouses, grandchildren, and siblings.

For more information, call 877-ASK-FDIC or go to the FDIC's Web site.

Don’t be duped by fake check scams

A colleague brought us a letter he received in the mail at home that included a very real-looking check for $3,860.95. The letter informed him that he’d won $288,000 in a lottery, and that the amount of the check was deducted from his winnings, partially to pay the taxes that would be due on the total amount. The letter, which bore no return address but was posted in Canada, went on to instruct the “winner” to call for specific instructions on how to claim the full prize.

We didn’t call the number but we’ve seen this sort of thing before, so we knew it was a scam. For one thing, our friend never entered any lottery or sweepstakes, which presumably one would have to do in order to win. But this type of rip-off takes other guises—job offers or mystery shopper assignments, potential love interests in other countries, overpayment for items being sold at auction, even free pedigree puppies. What they all have in common is that they ask you to send money or personal information back to the scam artist.

The ones that come with checks attached might be the most convincing. You’re told to deposit the check and immediately send part of the proceeds to a third party for a reason that sounds legitimate. Of course, by the time you find out that the check was bogus, you’re out the money you sent—and probably bounced check or overdraft fees that your bank will hit you with.

“Most Americans don’t realize they are financially liable when they fall for these scams,” says Susan Grant, vice president of the National Consumers League. “There is no legitimate reason anyone would mail you a check or money order and then ask you to wire money in return. People need to know that checks can take months to clear, even if the money initially looks like it’s in your account."

The National Consumer League says that victims lose an average of $3,000 to $4,000 in fake-check scams. The league, along with the U.S. Postal Inspection Service and other partners, recently launched a Web site, FakeChecks.org, to help spread the word about these scams.

Bottom line: As realistic and enticing as that check looks, don’t cash it. File a report with the Federal Trade Commission or the postal authorities.
 

Time to plug in the shredder and tame the clutter

If your list of 2008 New Year’s resolutions includes a vow to tackle the mounds of financial paper you’ve been collecting, here’s some advice from Rosanne Grande, a financial planner with R.W. Rogé & Co., in Bohemia, N.Y., on what to keep and what to shred:

• Bank records. Keep deposit and withdrawal slips until you get your bank statement each month. Retain monthly statements for at least seven years, in case the IRS audits you. Ditch CD records after the accounts mature and you collect the interest you’re due. The same advice applies to loan documents after you’ve paid back all the money that you borrowed, with one exception. Don’t burn your mortgage after you’ve paid it off. Keep it as proof of how much you paid for your house so you can calculate the tax, if any, on your gain when you sell it.
• Investment account documents. Shred the statements you receive each month or quarter as new ones arrive, but keep annual statements for seven years. If you still hold stock in certificate form, ask your broker to hold them for you electronically. You can also convert U.S. Savings Bonds from paper to electronic using the U.S. Treasury’s SmartExchange program at TreasuryDirect.
• Retirement-plan records. Retain your annual 401(k), IRA, and Keogh statements. If you’ve made nondeductible IRA contributions, keep Form 8606, which you must file with your tax return. It proves that you’ve already paid taxes on money in those IRAs.
• Credit-card receipts and bills. After you pay your bills each month, staple receipts for credit-card purchases to your statements and keep them for one year. They’ll come in handy if you need to return defective goods that you bought with a credit card. After one year, shred the receipts. You can do the same with your credit-card bills unless you need them to support tax deductions. In that case, hold them for seven years.—Denise Topolnicki
  

R.I.P. for the check?

For all the talk over the years about a cashless society, it’s looking like a check-less one could happen first. According to a Federal Reserve study released this month, more than two-thirds of noncash payments are now done electronically, primarily by debit and credit cards, and less than a third are made by check. Just four years ago, in 2003, the split was roughly 50-50.

Since 2003, in fact, the use of checks has declined by about 6.4 percent a year, the Fed says.

Debit and credit cards certainly are more convenient as a payment method than writing a check. To make sure that convenience doesn’t cost you, follow our readers' advice on selecting a consumer-friendly credit card. Also, when using a debit card, monitor your checking account to make sure you don’t overdraw your account and incur penalty fees.

Savings: Where to get high yields now

The Fed’s decision to cut rates in September gave a shot of adrenaline to the stock market, yet it also made it tougher on savers to earn a high rate of interest. In the aftermath of the cut many banks slashed their yields on CDs lasting a year or less and on high-yield savings accounts by half a percent or more. At least for the time being, it’s going to be harder to earn 5 percent on your savings. 

But if you’re out hunting for high yields there are still some to be found. Here’s a round-up of the best places to stash some cash:

Savings and Money Market Accounts. Big online savings banks like HSBC, ING, and Emigrant have dropped their rates. Yet at this writing, Capital One and Citibank are still offering 5 percent APYs. Zions Bank is paying 5.3 percent on deposits of $1,000 or more and 5.56 percent on deposits of $50,000.

CDs. Most experts expect savings rates to head lower in the near future, so if you’re trying to lock in 5 percent. look to a certificate of deposit. And if the Fed cuts rates again you’ll be glad you did. Advanta Bank,  Capital One, Centennial Bank, E*Trade, and Nexity Bank are all offering 5 percent or above on one-year CDs. Right now yields are pretty similar among 6 month, one-year, and five-year CDs, so you can choose depending on your time horizon. 

Shopping safe
To compare rates on CDs and high-yield savings accounts go to Bankrate.com.  The more money you deposit, the higher the rate of interest you may get. But as the recent bankruptcy of NetBank shows, you shouldn’t put more than the FDIC-insured $100,000 into any one Internet bank account.

That bankruptcy also underscored that you should check the financial strength of the bank before depositing your money. Bankrate.com and TheStreet.com both assign ratings to banks for financial health. All the banks mentioned above have three or more stars from Bankrate.com. Though you can often get higher yields from low-rated or un-rated banks, a couple extra basis points of interest aren’t worth the hassle of chasing down your money if the bank folds. —Chris Fichera