March 8th, 2005

rain

(no subject)

Financial realisation of the day - banking fees really are as evil as I viscerally felt them to be. I have approximately never paid banking fees, because I so strongly object to them, but it just struck me that you shouldn't either, and here's why.

Let's say that your bank has a $5 monthly fee if your balance is below $750 (that being unusually reasonable for American banks). Now let's look at the 'best-case' scenario, where you have nothing at all in your account, so you're getting the best 'value' for your fee (as compared to if you had $749, where giving them $1 would save you $5 which would obviously mean you're getting a terrible deal if you pay the $5). Effectively, then, you're paying $5 for the 'benefit' of not giving them $750 to hold, ie. equivalent to paying 5/750 interest per month, or 0.666%. As an APR, this is 8.3%, comparable to the sort of rate you're likely to get from a new credit card.

But who actually has $0 in their account for the whole month? Nobody. So it's actually like you're paying $5 interest on half that much, say, which makes it more like a 17.2% APR. And this is still assuming your fee is only $5, where $10 a month seems more common. Take it up to that and you're paying a whopping 37.1% APR on this money that you're so rudely not giving the bank up front. If your banking fees are like that, as so many are, you're actually better off taking the amount off a credit card (even as a cash advance that they charge more for, though you can gimmick your way around that hiked rate if you have two cards, via the stupid power of balance-transfers) and giving it to the bank. Always treat the fee-boundary as zero. This goes double for overdrafts.

Similarly, and more obviously (but still insufficiently obvious for oh so many Americans), any money you get that's earmarked for something that can be paid by credit card, should be paid by credit card (and the original money should go to the credit card) - credit cards mostly don't charge interest on new transactions for a month-and-a-bit, so, assuming you're owing on your credit card, like an average American, if you pay your rent and utilities ($800, say), out of your paycheque, your credit card remains unchanged. If you send that $800 from your paycheque to the credit card, and pay the bills with the credit card, the numbers on the credit card still won't change, but that's $800 that you won't pay interest on for a month and a half, and it didn't cost you anything different. You save somewhere between $6 and $25 depending on your credit card interest rate, and for bonus points this 'larger payment' to the credit card will tend to improve your credit rating.

Today's episode of Open Sesame Street has been brought to you by the sound 'gah', and by the symbol '$'.