Debit cards and overdraft fees

Last night there was a story on NBC news about a young soldier, Private Cid, who was having problems with his bank debit card. Since a couple of my family members recently had similar problems, I felt like it was time to speak out. I did some research and found some potential answers, political and practical. This may be long, but I encourage you to read on.

It seems young Private Cid uses his debit card daily for a lot of small transactions. In fact, the video story can be found at this site (I just rewatched it) and it says the average debit card transaction is under $20. In one day Private Cid had five such transactions, for pizza, sandwiches and such totaling $33.41. Trouble was, he didn't have the money in the bank and encountered $175 in overdraft charges. In a single five month period, he had total overdraft charges of $1785. For a young army private, that's more than a month's salary.

Now the individual in this story is an army soldier which brings a special feeling of patriotism (no mention was made of where he's serving). But this could easily apply to my son or my daughter. And since I know a few people who recently faced similar situations, I paid special attention. Overdraft fees are a "cash cow" for the banks and they will make over $27BILLION with these fees. I can be somewhat cold sometimes (my kids think all the time) and I think the bank deserves to make a profit, but they don't have to make it all on me (or my family).

There are some proposals that may change the way these overdraft fees work. I tend to favor less legislation, but in this case, the banks have not been playing nice (even if they've been playing by the rules) and it's probably time to change the rules. However, changing the rules won't be 100% in favor of the consumer and the consumer is bound to lose some in the deal. For example, banks claim they pay these over-charges as a courtesy to consumers and that "6 percent of consumers were glad their charges were paid, despite the overdraft fee." Overdraft fees only affects about 18% of Americans (details on the legislation and the source for this is here -- do I get bonus points from liberals by quoting a newspaper with "democrat" in the name?).

But if you're counting on the government to bail you out of overdraft prison, you might be stuck for a while. So I have a simple solution and some alternatives to help you in the mean time. They do require a little discipline and I know that's hard to come by these days. One simple solution is to keep track of how much money is in your account and never go below $0. Only the government can keep spending when the balance reaches $0 and if you're not printing money in your spare room, you can't get away with it.

Another solution is to "hide" some money in your account. The amount depends on the most you charge in a given day. Say you regularly charge about $33.41 in a day like Private Cid. You put an extra $35 in your account and mentally subtract that from the balance each time you check it. For easier math, just make it $100. Then when your balance goes below $100, you think "Oh No, I've overdrawn" and you put it back. This requires some extra discipline because you have to make it a practice NOT to spend that $100.

Traditional banks sometimes offer "sweep" accounts, where you can have money in savings and have it "sweep" to checking when you overdraft. This, or a line of credit, will effectively do the same as "hidden" money. But these aren't always available to everyone.

Finally, I'll mention a new, high-tech way to help. This is especially relevant to the two people I know who recently had over $100 in overdraft fees, but also relevant to everyone. My bank of choice is BB&T. They offer "Alerts" on their website. In fact, I just signed up for alerts myself. You go to the website and specify that you want to be notified when your balance drops below a certain level (I chose $100). You can have it alert you when a deposit is made, or when a check clears. You can have it alert you when you get an NSF charge (that way you can STOP SPENDING). You can even have it send you your balance each day so you know how much you have to spend.

BB&T alerts are free and can be sent to your email or even your cellphone (normal text rates apply). You can specify what time of day the alerts are sent so you don't get woken up at 8am every day. While I don't intend this as a commercial for BB&T, I strongly encourage everyone (especially overdraft prone people) to find out what their bank offers.

* Update - my editor in chief (wife) pointed out that this doesn't always take in to account pending transactions. Also, I noticed that some alerts don't come out on weekends and holidays. You still have to have some personal responsibility. But this can help you manage your account.

Profit in healthcare

You may have heard that the health care industry is stepping up to the newest health care plan working its way through congress. This article says that the drug companies were first to step up by giving up $80Billion and now hospitals are stepping up to accepting $155 in cuts. The reason they are willing to give this up (according to the article) is that "they're trying stave off a much bigger hit if the government sets up a public health insurance plan that pays them according to the relatively stingy fee schedule of Medicare."

So they see this as the least offensive option. But my question is, where will the cuts come from? Now I'm the first to say that hospitals charge very expensive rates. They routinely discount their rates 50% or more for insurance companies and my recent experience with some self-paid bills indicate that an individual can get the same discounts.

So these new cuts must be in addition. But what are they going to cut out? Just the "overhead"? Well, even if that's true, "overhead" results in jobs. In moving all records to electronic records, some paper pusher will lose a job. But my concern isn't just for paper pushers, it's for the other jobs. The person who cleans the rooms, the person who prepares the meals, and (most importantly) the nurses, doctors, aides, etc.

If profits are good (as I stipulated last month here), then profit in health care is good. And cutting that profit means job losses and (more scarily) potentially cuts in service.

Profit revisited

Last November, I posted an entry about profits. (see here) The basic point I tried to make was that profits are not immoral or evil and it's actually good for companies to make a profit.

Lately, I've dug up an old memory from back in the 1990's related to profit. It seemed very important to me. During that time, we were experiencing what some people called a "rolling recession". One industry would be hit with hard times for a while, then another. One of my co-worker's parents ran a fishing boat, somewhere up North. Small, family-owned business at it's best.

One day he reported a story where he asked mom & dad how the business was doing. "Hard times" they said, they had to run the business with just 3 or 4 workers. The output was higher than ever, but competition and the "rolling recession" was hitting the business hard.

He explained that in good times, they had 8-10 people working for them. "How are you able to make it with just that few people?" he asked them. "What's different?"

Their reply was that in good times, they hired more, in rough times they trimmed down. A higher gross profit allowed them to spread the wealth (at their choice).

It seems to me that when companies like this profit, it's a good thing. They hire more workers. Sure, they aren't as efficient as they could be, and the consumer ends up paying for it, but (if there is competition) the consumer doesn't really lose out.

More about profits on another day...

Profit prohet part 2 - Magazine subscriptions

I hadn't planned this post, it just came up yesterday. In the morning, I went to fill my tank ($1.65/gallon - woohoo!) and my credit card was denied. Later in the day my wife said one of her Christmas purchases (online) was returned. Being the master sleuth, I looked at these two events and recognized a pattern.

My wife called the credit card company and after speaking to one of India's finest found out there was a charge from a "highly fraudulent" company, so the card was put on hold. (Why didn't they call me to tell me this? That's work for another day). Anyway, it seems a subscription renewal service had charged $94.64 for a magazine. I won't publish the name of the mag, but let's just say it's devoted to sports and is very well illustrated. I like the photos and my son likes the stories.

So, my wife called the magazine to find out about the charge. I distinctly remember getting a "courtesy card" a few weeks ago telling me the renewal was coming. I didn't know if it was a 2 or 3 year renewal. When she asked, she was told this was for 1 year. She explained that she thought this was a lot of a year and was asked if we had received any promotions. No, she explained, this was an automatic renewal.

After thinking a bit, the gentleman reduced the price to $49.84, a 47% savings. Two more calls to India's finest at my credit card company and the card was reactivated.

Now, the magazine is definitely entitled to a profit. They have some of the best photography I've ever seen. They have to pay those photographers and a lot of writers. They have to distribute the mags. And some investor wants to see some return on his/her money. But they don't have to have over 100% profit and they don't have to get it from me.

So, here's the moral of the story (that I learned yesterday). Never use automatic renewal on the magazines. Always ask for a lower price. The savings will buy my wife and I dinner.

Multi-level marketing

I've written about pyramid schemes and profit, I thought I'd devote a few bytes of storage to discussing multilevel marketing (MLM). Also called network marketing (my preferred term), this is a group of people, most working only on commission, who sell a product through other people. For example, you may get a call from your friend to sell a product and find out his friend got him involved. Once you start selling, you'll be encouraged to get other friends involved. You'll get a part of the commission on each product your friends sell, and you'll pass some of your profits up the line.

Sound a little like the pyramid scheme? Well, you're not alone in thinking that, but more on that later. Examples of multi-level marketing include some well known companies like Avon and Mary Kay. Amway was probably the biggest named MLM company for a long time, but has since dropped in popularity. Another company that I've heard about is Vector Marketing. Vector sells Cutco knives. Reported to be the best knives in the industry, the most popular knife set sells for about $1200. With "associates" making commissions of 10% to 30%, a person could make a lot of money selling these products.

You can even spot older and more common examples of network marketing. Tupperware, Christmas Around the World, and even lingerie parties (I never get invited).

But network marketing counts on you selling your products to your friends, co-workers, family and those around you. If your selling technique is abrasive, you can start losing your friends. Co-workers and family and people will avoid you. If you're not a strong seller, you might just go hungry. This means that MLM works best with products that, to some degree, sell themselves or are consumable, like Avon and Mary Kay. That way the customer comes back to you. It's hard to use up a knife set (unless you're OJ Simpson), but make-up is used ever day.

So what's the difference between network marketing and a pyramid scheme? Basically, it's the product. In my airplane example of the pyramid scheme, there is no product involved. With Mary Kay, Avon or Vector the purchaser has something they can hold in their hand. The product may be overpriced, there are a lot of people who make a profit on the product, but at least there is a product.

So where is the line between pyramids and networks? 70% according to MLM Legal Attorney Jeffrey Babener. The idea is that 70% of product sales should be to outside consumers, not just to build inventory or for self-use. If an "associate" buys a lot of product for his/her own use, they're not really selling. (Same goes for "selling" to your family). Also, most of the commissions earned by an "associate" should be from product sales, not for signing up other "associates" (sometimes called "suckers").

I should note that Amway was sued for being a pyramid scheme. However, this part of the lawsuit was dropped. They were found guilty of price fixing, but their sales technique was not dismantled. (see here).

MLM is not the same as a pyramid scheme and the profits are (at least somewhat) justified. However, the companies should be evaluated and anyone entering an MLM should make sure he/she knows the costs associated.

The profit prophet

Ok, I admit I like cute subject lines. And I don't claim to be a Prophet with divine wisdom or to be able to determine the future. My intent with this blog post is simply to speak some basic facts about profits. And according to this site, a prophet is a person who brings a message or warning.

You may recall that I posted a couple of days ago about pyramid schemes. (see here) This is a method of making a quick profit. Unfortunately, it's an illegal method. Participants in these schemes are falsely promised great profits, but aren't told that the game will end and many people will be left with no profit at all.

But I want to be sure to send a message that profits are not always a bad thing. In fact, profits are good for everyone.

Let's say you take your car in for repairs. You realize that Bob the mechanic is buying parts and then marking them up before installing them on your car. Then he charges you a service charge for the time he actually works on the car. Why should he be entitled to a profit on the parts?

In my simple example, there are a lot of reasons that Bob should receive a profit. For starters, Bob's family counts on his profits. They probably like to have things like a house to live in, food on the table and maybe even clothes (unless Bob is a private nudist). Bob may also have expenses not directly related to your bill. Bob has to pay for electricity at his shop, franchise fees, advertising and that nasty tasting coffee that you drank in his waiting room (It wouldn't be nasty tasting if he read Steve's blog here).

Bob may have some management and they too have families and needs. Of course, Bob's co-workers also contribute to management's well being, so they're not entirely dependent on your car repair.

So profits for Bob the mechanic aren't a bad thing, in fact they're required. If Bob didn't make a profit, he probably wouldn't be repair cars. Instead he'd go to work as the greeter at Wal-Mart or take some other job that pays him for his efforts. Of course that doesn't mean that Bob has to make ALL of his profits from the repair of your car. You'd expect him to work on other cars as well.

My whole point here is to point out that profits aren't all bad. As you might guess, this is part of a series and (big surprise here) I have other thoughts in this series. You'll just have to wait a day or two to hear more.