Banks are custodians of money but like any other business, they need money to survive. It’s not enough that they keep money for you. Running a bank takes a lot of resources in terms of physical and human resources, and even becoming more important today, technological and security infrastructure in order to operate. Banks need a lot of money in order to survive. The thing is, they cannot just use the money you deposited to run their business. Instead, they do it in several other ways.
One of which is lending money from depositors to borrowers then charge them with an interest. If you keep money in a bank, you’re probably getting less than 1% in deposit interest per year. Yet, if you borrow from them using your credit card, you get charged with an 18% interest rate! Horrendous, but it’s how it works.
If you do not want to be charged with other fees, you might want to be aware of the following ways on how banks make money from you through bank fees and charges.
These are fees that banks charge to your checking account when it is overdrawn. That means that your account had insufficient money at the time when it was charged so your bank had to cover the cost then charge you for it. Banks are now required to offer their clients an option to either opt in or opt out of overdraft protection. If you opt out, your bank will not cover the costs and no overdraft charges will be made. However, there will be a minor inconvenience when a bank declines your transaction because of an overdrawn account.
NSF (Nonsufficient Funds) Fees
These are fees charged when you do not have an overdraft protection yet your account had insufficient funds to cover a check that your bank was trying to clear. Insufficient funds result in bouncing checks, and bouncing checks result in NSF fees.
Minimum Balance Fees
One of the best ways banks make money is by lending money and charging interest to borrowers. In order to be able to loan out money, they need to have cash, that’s why banks typically require their account holders to have a monthly minimum balance. The amount usually depends on the bank and the type of account you have. Your monthly minimum balance is usually computed by taking the average daily balance of your account for a certain number of days, typically one month. If you fall below the required balance for your account type, you’d get charged.
Foreign Transaction Fees
When you go on a trip abroad and use a credit card that was issued in the United States, most probably your bank will charge you with a fee for converting your foreign currency into local currency, which can run up to 3% per transaction. This may seem small but because it is charged on a percentage basis, it means that it will go up with the amount of foreign purchase you charge.
ATM Transaction Fees
ATMs cost banks money to maintain, and unfortunately, these costs are shouldered by the very depositors of the banks who want to access their own money. Seriously, if you have to pay your own bank to access your own money, then it might be time to switch to another bank.