The New Year's tradition of making resolutions is sometimes an opportunity to turn dreams into specific goals and efforts - like losing pounds gained during holiday excesses. When it comes to financial matters, now is a perfect time to also assess lending habits and ways to develop greater financial security. In a downturned economy, where jobs are scarce and dollars are short for many Americans, learning how to keep a greater portion of your monies is a resolution worth the effort. If changes in consumer financial habits can begin in the New Year, chances are there will be a big and better difference by this time next year.
These changes can especially benefit consumers with modest incomes as well as those living on governmental assistance and fixed incomes. In fact, the fewer the financial resources, the more important it becomes to avoid high-cost lending and derive greater use of your own money.
For example, if your bank has begun to charge service fees for checking accounts, review the fine print that announced those changes. Payroll direct deposits or maintaining minimum balances may be available options that could spare consumers pesky monthly fees. If you earlier opted in for overdraft coverage, now is a great time to opt out of it and the accompanying average cost of $34 per transaction. Surveys have shown that the vast majority of consumers would prefer to have a transaction declined rather than incur these fees.
If your bank does not currently offer these kinds of cost-savings options, it might be time to shop around with area competitive banks or credit unions. As non-profits, most credit unions offer lower rates than commercial lenders. Lower rates and fees translate into significantly cheaper financing costs for major purchases such as homes and vehicles.
Although bank and credit union accounts are widely used, approximately nine million Americans have no bank account at all, according to the Federal Deposit Insurance Corporation. FDIC estimates that one in five black households is unbanked and relies upon fringe financial services to transact their personal business. A sure way for these consumers to begin building savings would be to avoid fee-based and high costs of check-cashing services, pre-paid debit cards as well as payday and car title loans.
Typically, check-cashing services charge a percentage of the check being cashed. As an example, if a Social Security check of $1,000 is cashed at a cost of $24.75, in a year's time, the store will take $297 from the recipient. Even with a bank account monthly service charge, the recipient would keep more of their money. If a bank or credit union charged $7.00 per month for an account or $84 per year, the difference the consumer would keep is $213. That amount of money could be better used for utilities, groceries or even savings.
Pre-paid debit cards, a growing financial product may also be a more expensive way to transact personal business as well. Whether offered online or from a growing list of major retailers, pre-paid cards frequently come with multiple costs.
Beyond converting money into plastic, activation fees are often charged. If ATM use is allowed, additional costs may be incurred for using these conveniently-located machines. Further, if a consumer wants to 're-load' the card once original funds have been depleted, another fee could kick in. In short the fee totals deny consumers full use of their own money.
Perhaps the highest cost of fringe lending occurs with payday and car title loans. Each year, the 12 million Americans using payday loans generate $4.2 billion in fees alone. According to research by the Center for Responsible Lending, most payday customers borrow an average nine loans per year at 400 percent interest; 76 percent of these loans represent repeat borrowing on the same principal.
The 17 states and the District of Columbia that have enacted a double-digit rate cap on payday loans have together saved their consumers $1.4 billion in fees. While the legislative battles over these high-cost loan products continue, right now every consumer can say no to high-cost lenders. It is one time when saying 'no' will mean 'yes' to improving your own financial future.
Charlene Crowell is a communications manager with the Center for Responsible Lending.