In the January 4th edition of NPR’s Fresh Air, Bob Sullivan, a reporter on consumer affairs, electronic privacy and computer crime offers forty minutes’ worth of suggestions and inside information about consumer credit, loans and debt in the U.S.

The entire podcast (available here) is worth a listen, but here are some highlights.

On Overdraft Fees & Free Checking Accounts

Sullivan discusses a rarely addressed part of the reforms introduced by the Credit CARD Act, set to take place later this winter that could influence they way people bank.

• Free checking accounts: These, he notes, are currently offered by many banks around the country. They work by allowing customers to keep their money with a bank and withdraw it as needed. The bank cannot lend that money and therefore cannot make a profit from it; in other words, the bank provides a service that costs them money (a checking account) for free.
• Overdraft fees: When debit card users attempt to make withdrawals or purchases that exceed the amount of money they currently have in their checking accounts, most banks charge an overdraft fee. These fees average about $35 each, and are currently charged for each transaction that overdraws an account.
• New legislation: One of the consumer protections in the Credit CARD Act is a limit on overdraft fees that banks are permitted to charge. The law both caps the total number of fees that can be charged per account per day and tightens regulations on this courtesy service, which may require banks to let customers opt out.
• Checking accounts that cost money: Up until now, banks have essentially subsidized free checking accounts with the profits made on overdraft fees – the people who incurred lots of overdraft fees provided them with enough income that they didn’t need to charge a flat fee for a checking account. With limits on that revenue source, Sullivan claims, many banks will need to begin charging an annual fee for checking accounts.

So is this a good thing or a bad thing for consumers? Maybe a little bit of each. The positive side is that, when the Credit CARD Act takes full effect, consumers will be able to have more control over the terms of their checking accounts. The bad news is, they may have to pay for these accounts. But, as Sullivan points out, at least consumers will have a more realistic idea of what a checking account truly costs as a product and service.

Before Committing to a Balance Transfer

The restrictions and limitations put in place by the Credit CARD Act offer consumers many protections we didn’t enjoy in the past, but, according to Sullivan, one important aspect of credit card payments is not regulated by the new law – or any other law on the books.

It has to do with minimum payments on credit card bills. Here’s an unpleasant scenario that many Americans have already experienced:

• High balance, high interest: You have a credit card that is either maxed out or close to it, for which the interest rate is relatively high, and on which you’re only able to make the minimum payment each month. However, you’ve been able to maintain that payment successfully and are in good standing as far as the card issuer is concerned.
• Balance transfer offer: You receive an offer for a balance transfer to a new credit card that includes a super-low (say, five percent) interest rate for ten years, guaranteed as long as you maintain at least the minimum payment each month.
• Balance transferred: You now make payments to a new credit card company (or perhaps to a new bank, thanks to a merger—see below for details).
• Minimum balance raised: Because no law prohibits credit card issuers from raising minimum balances due each month, an issuer can do this without warning. And, if you cannot pay (which is fairly common, since an increase of only three percent can translate to hundreds of extra dollars per month), the interest rate jumps.

As noted above, the increased minimum balance charged can happen even if you don’t actually transfer a balance: in some cases, bank mergers mean new policies for products like credit cards.

The simple way to avoid this trap is to read the fine print of balance offers very carefully to determine whether or not there’s a chance that your minimum amount due could be raised. But, warns Sullivan, if your minimum balance is increased simply as the result of a merger, you may be out of luck.

In the interview, he conjectures that legislators simply didn’t think of this technique that credit card issuers could use, which is why they didn’t include protections against it in the Credit CARD Act. So consider contacting your Senators and Representative and letting them know how you feel.

Additional Resources

Credit CARD Act of 2009 (PDF)