Banks Behaving Badly!

Banks love to make money at our expense, but how many of their rip-offs do you know about? Our insider's guide reveals close to thirty tricks!

Although these days I think of myself as a good guy, I used to be on the dark side of the financial Force.

In my previous career as a marketing manager, I wrote brochures which lured many customers to their doom. I designed poor-value products which sold in the millions. In short, I sacrificed my soul to Mammon. After fifteen years of foulness, I quit to become a financial writer.

This is my dream job -- and one which enables me to undo some of the harm I've caused in the past. Who knows, maybe one day I'll make parole, or even convince a financial firm to make money with integrity by building honest, long-term relationships with its customers!

So, without further ado, here is my insider's guide to the everyday rip-offs that lurk within the banker's lair. I'll start today with banking and credit cards and continue later this week with insurance and investments, mortgages, personal loans and savings accounts. Read on -- and may the Fool be with you!

BANKING

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1.Banking is bad for businesses

Although the Competition Commission ruled in 2002 that banks were massively overcharging small businesses for everyday banking, things have barely improved since then. Indeed, a press release from independent financial researcher Moneyfacts revealed that interest rates and charges for unauthorised overdrafts have soared, which makes a mockery of the Commission's enquiry.

Let's hope that the Office of Fair Trading's current review of business banking benefits small businesses. In the meantime, read Best Buy Accounts For Businesses.

2.Blinding us with brands

As I explained in Do You Know Who You're Dealing With?, many banks disguise themselves by operating under various different brands. Do banks really need so many different disguises and identities? Doesn't this just dilute the power of their branding?

For example, credit cards from Abbey, Alliance & Leicester and Virgin Money are all, in fact, issued by giant US bank MBNA. With over 1,300 different credit cards to choose from, you could find yourself applying for two apparently different credit cards, only to be rejected because both are issued by the same firm. Oops!

3.Delayed cheques and slow payments

Other countries have same-day cheque clearing, so why don't we here in the UK? Alas, if you deposit a cheque on, say, a Monday, you won't earn interest on it until Wednesday at the earliest, when it is 'cleared for value'. Although some banks have now switched to paying interest from day one, the worst accounts still take up to ten days to clear cheques for interest purposes. Ouch!

In addition, banking payments association APACS has agreed to speed up automated payments made via the Internet or telephone. At the moment, it takes a minimum of three working days to transfer payments between different banks via BACS. Although banks have promised to introduce a same-day system next year, we're stuck with a Soviet-style system for now!

4.Extortionate fees for instant cash transfers

If you need to transfer money between two accounts on the same day, you can use CHAPS, the Clearing House Automated Payment System. Naturally, this convenience comes at a price: as I warned in The Cash-Transfer Swindle, the true cost of these transactions is just a couple of pounds, yet many banks charge £35 to £50 for instant transfers. What a con!

5.Hiding information in the small print

When it comes to financial products, the Devil definitely lurks in the detail. Banks love to hide away their horrors, so it pays to read through the small print. Otherwise, you'll find yourself being hit by hidden fees and charges galore. So, be cynical and look for the loopholes and hidden traps, because they are sure to be buried away somewhere!

6.Holiday-money horrors

In Get More Currency For Your Cash, I revealed that the difference between the best and worst deals for foreign currency is roughly £60 for every £1,000 which you convert. Don't buy euros, dollars and so on from high-street banks and travel agents. Instead, try Marks & Spencer, or order currency online in advance from Travelex.co.uk (but not from its bureaux de change) and collect it at the airport, ferry terminal or rail station.

7.Plugging packaged current accounts

In Don't Be Mugged By Your Bank, I warned against paying £120 a year or more for a packaged current account which offers 'free' added services of dubious value. We Brits waste over £500 million a year on packaged bank accounts, but my advice would be to stick to a current account which doesn't charge monthly fees and then shop around for any additional services which you need.

8.Rip-off fees for sending money overseas

Sending money abroad is seriously expensive, thanks to sky-high transmission fees and currency commissions and poor exchange rates. Learn how to make cheap money transfers in Five Ways To Transfer Money Abroad and Five More Ways To Transfer Money Abroad.

Get a cracking current account and earn over 6% while in credit!

CREDIT CARDS

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9.Interest rates are going up

At the beginning of 2006, I checked the interest rates charged by over three hundred different credit cards, and discovered that the average rate charged on purchases is a tidy 15.6% APR (including annual fees). However, dozens of cards have increased their rates since then, so I suspect that the typical credit card now charges at least 16% APR on spending. This is more than three times the Bank of England's base rate, which is 4.75% a year at present!

10.Higher balance-transfer fees

In August 2004, Barclaycard became the first card issuer to introduce handling fees on balance transfers. Since then, almost all card issuers have jumped on the transfer-fee bandwagon. So, when you want to transfer expensive plastic debts to a 0% credit card in order to enjoy up to a year's interest-free credit, you're almost sure to pay a fee for the privilege. Still, paying, say, 2% to enjoy a year's break from sky-high interest rates is no bad thing!

11.Protection premiums are rising

In my opinion, the rip-off to beat all financial rip-offs is payment protection insurance (PPI). As I showed in this article, almost all credit-card issuers charge ridiculously high premiums for this life, accident, sickness and unemployment cover. So, payment protection insurance gets the gold medal in my Banking Hall of Shame!

12.Card protection plans? No, thanks!

If your credit cards are lost or stolen, simply call Card Protection Plan or Sentinel, which are the two leading providers of these plans. These firms will arrange for your cards to be cancelled and replaced, will provide you with an emergency cash advance, and will cover any fraudulent spending on your plastic.

However, this service costs at least £15 a year, yet cardholders are only liable for the first £50 of fraudulent spending made prior to notifying their card issuers and, in any case, most issuers usually waive this £50. A friend of mine who worked at one of these companies told me that their profit margins were the highest that he'd seen anywhere, so I've never bought this protection in my life!

13.Minimum monthly repayments are falling

In The Day That Credit Cards Turned Nasty, I showed how low minimum monthly repayments (MMRs) can turn a modest debt of, say, £2,000 into a burden that lasts more than four decades!

Although only around one in thirty cardholders regularly pay MMRs, this is an option only for the desparate. Instead of paying, say, 2.5% a month, set up a direct debit or standing order for, say, a flat 4% of your balance and then stop using your credit card. Within three years, your debt will be dead -- or even earlier, if you transfer your balances to a 0% credit card!

14.Credit-card penalties have been sliced

Following a ruling by the Office of Fair Trading, credit-card companies have roughly halved their fines for late or missed repayments and exceeding credit limits to no more than £12. Er, surely this is a good thing, right? Not exactly, because the card issuers have hit back by raising fees, charges and rates in other areas, so even more cardholders will lose out in the long run. Banks won't let anything cut into their bloated profits, so expect more increased charges as bad debts start to bite!

15.Cashback deals are declining

Another trend which bothers me is the decline in decent cashback offers. As I always pay off my credit-card bill in full each month by direct debit, I use a cashback credit card to earn free money as I spend. After using my latest cashback card for a year, I received a cheque for £115, which was most welcome!

Then again, card issuers tend to launch a great cashback offer, only to fiddle with (or even withdraw) it later, so it's hard to get a consistently high rate of cashback on your spending with no strings attached. According to the Fool's search wizard (which is powered by Moneyfacts), the Best Buy cashback cards at present for a monthly spend of up to £500 come from Morgan Stanley and Egg Money.

16.The foreign currency rip-off continues

When you use your credit card abroad or buy goods from foreign websites, as well as receiving an unattractive exchange rate, you get hit by a currency-conversion charge, typically an extra 2.75% on top of the price in sterling. However, a few credit cards don't charge these fees, notably those issued by Nationwide BS. Also, the Post Office abolished this fee with effect from 2 October, making its plastic a new Best Buy for overseas usage.

Later this week, I will reveal another host of banking tricks in part two of this article. Watch this space!

More: Check out these brilliant bank accounts, cracking credit cards and perfect personal loans!