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Romans: Watch out for these credit card and banking gotchas

By Christine Romans, CNN
Christine Romans' book explores how adopting a new approach to money can lead to a healthier financial lifestyle.
Christine Romans' book explores how adopting a new approach to money can lead to a healthier financial lifestyle.
STORY HIGHLIGHTS
  • Christine Romans advises consumers reject overdraft protection
  • Romans: Going into overdraft equals dipping into funds you don't have
  • She says to look out for all types of fees: Overdraft, paper billing, maintenance
  • Romans: Banks will soon add fees to formerly free checking accounts
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Christine Romans is anchor of CNN'S"Your $$$$" Below is an excerpt from her new book, "Smart is the New Rich, published by Wiley

Romans' Numeral: $24 billion: Amount in overdraft fees collected from consumers in 2008.

Americans spent more money on bank overdraft fees in 2008 than they did on fresh vegetables, postage, cereal or books. We nearly spent more money on bank fees than we did on major appliances. (At least when you buy a washer and dryer you get clean clothes! You get nothing in return for bank fees.) One of the most important new benefits of the new laws means that your credit card must get your permission first, before you will even be allowed to overdraw the account. [Congress has since passed new laws meant to protect consumer from exorbitant fees charged by credit card companies]

Hint: Smart consumers do not sign up for overdraft protection. If you do not have the money in the account, you should not be spending it, and you certainly don't want to pay fees to use money you don't have in the first place.

Banks long played this as a "convenience" to their customers, who would be embarrassed to have their debit card rejected because they didn't have the money in the account or their credit card turned down because they were over the limit.

Analysis by Bankrate.com shows bounced check fees draw an average charge of $29.58. Before Congress shut down the overdraft fee machine, those fees could reach $36 a pop. And many banks could shuffle the order of your purchases, so you could get the overdraft charge again and again on the same day. Across the country, the same person could buy a latte, then milk and bread at the grocery store and then fill up the gas tank -- and pay an overdraft charge on each.

Those days thankfully are over. There is a limit to how many times you can be hit with overdraft charges. Some banks, led first by Bank of America, don't allow overdrafts any longer.

Starting in the fall of 2010, the debit card overdraft charge cannot exceed the size of the overdraft. That means no more $35 overdraft charges for a $4 latte. And the Federal Reserve is shutting down the awful "inactivity fees" that were cropping up after credit card reform. No longer will the bank be able to charge you $19 a month for not using your credit card.

But even as lawmakers and the Federal Reserve work to shut down the fee machine, you can count on the lenders to try to find new ways to generate that money.

No good businessperson wants to give up $24 billion in revenue easily. That's why some ingenious new charges popped up even before consumer protection laws to prevent credit card shenanigans went into effect.

-- No more free checking. The days of plunking $500, $1,000 or $1,500 in a bank account and keeping it there for free may be over. The major banks are already planning to add basic fees to many of their formerly free checking accounts.

Credit card reform shuts off the fee spigot for them, a flow of cash that had subsidized the administrative costs of checking accounts up until now. Unless you keep a high balance in the account (more than, say $5,000) or you have multiple relationships with them (mortgage, auto loan, savings account, so on), you can expect a monthly maintenance charge.

Shop around. Consolidate your financial accounts and ask for free checking if you are keeping all your relationships under one roof. Also check credit unions. They offer free checking.

-- Denied! Card issuers can still close your account without notifying you, can cut your credit limit without notice and warn the analysts at Credit.com. If you have a good history with the credit card company, you can try to call and restore the credit limit, but in many cases, you're out of luck, especially if they dump you as a customer.

-- Fees for a rewards card. Even good customers may find the rewards programs they have used for years might come with more fees attached to redeem awards or even new annual fees. Even if you are a prime customer who pays on time and rarely carries a balance, you will find new fees as well.

Your rewards program may be cut: Some 5 percent cash-back programs have already switched to cash back for only certain categories.

-- Students must have a co-signer. It will be harder for young people to pile up the credit card bills, an important first step to learning some financial responsibility, but it also means that college kids who have parents without good credit histories may find it harder to get a card of their own.

The under-21 crowd will need a job with good income or a co-signer to get a card in their own name. Gone are the days of the prescreened and preapproved credit card offers stuffed into the textbooks you buy.

Bankrate.com lists four options for anyone younger than 21 who needs a credit card:

1. Get a co-signer.

2. Become an authorized user on your parents' or grandparents' card.

3. Use a prepaid card.

4. Use a debit card.

-- No mercy if you are late. If you miss payments and carry huge balances, these new protections don't help much. Pay the minimum on time. Use automatic bill pay to pay the minimum if you are prone to cutting it close each month and then pay the full balance online if you can swing it.

But remember, your goal is to pay these cards in full each month. Then your interest rate is zero. There are no late fees or penalties, and you can begin to build wealth elsewhere. Remember, you want to build your wealth, not the credit card company's.

-- Foreign currency fees. There are no restrictions on the fees credit card companies charge you to use your credit card overseas and convert your borrowed dollar into a borrowed euro, pound or yen. Already those fees have risen for travelers overseas.

-- Charging for paper statements. Get ready for this. If you are juggling numerous credit cards and trying to manage them all, you should be following them closely online anyway. Ditch the paper and make a habit of checking your credit card statement online every week or two.

-- Higher base interest rates. You must have 45 days' notice that your interest rates are rising. According to Bankrate.com the average interest rate on all credit cards is 14.36, but experts warn that even for good borrowers, interest rates could reach 18 percent as the new rules go into place.

Anyone with a poor credit history can expect higher interest rates than that. Remember, if you pay your card off in full each month, your effective interest rate is zero. This should be your goal every month.

-- Out of luck. Credit counselors say that people with low income and sketchy credit histories are having their credit lines cut or are even losing access to cards.

We are in the midst of a huge consumer deleveraging that has just begun: Too much credit is available to too many people, and that bubble is still bursting. It means banks, to protect their profits, may well cut out risky borrowers.

New laws mean that banks cannot raise interest rates right away on borrowers who have become late or missed payments, so they may well simply stop lending to customers like this.

That forces consumers with low incomes to borrow money from payday lenders and check-cashing storefronts at high interest rates and with high fees.