DIANA KEANE: Hi. My name is Diana Keane. I'm calling from Columbia, S.C. And the weather here is already starting to get hot, and that reminded me of a change that I make to how I do laundry. So whenever our air gets hot enough that we're running our air conditioning, I will hang up our laundry instead of putting it in the dryer. And I found that this small change helps keep our house more comfortable. And I also like it because then I don't feel like I'm paying to heat up my house in the dryer and to cool it down. So just wanted to pass that along in case it was helpful to anyone else, especially since we're all spending most of our time at home.
CHRIS ARNOLD, HOST:
If you've got a good tip, leave us a voicemail at 202-216-9823, or email us at email@example.com. This is NPR's LIFE KIT.
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ARNOLD: You know that feeling when you look at the windshield of your car and you see a parking ticket, and it's just like, (groaning) parking tickets? I should've just paid the meter, and now I'm stuck paying this 30 bucks. It's kind of the same thing with bank and credit card fees.
With parking tickets, though, maybe you get one or two a year - it's not the end of the world. But with bank fees and credit cards, it's just way easier for those to snowball. And pretty soon, it can be like the whole windshield of your car is just, like, plastered with tickets.
LAURA BITTNER: Over six months, I was charged about a thousand dollars for the bank overdraft fees and the credit card fees.
ARNOLD: If this sounds familiar, it's happened to you, you are not alone. I mean, millions of Americans are paying huge piles of money in bank fees and high-cost debt.
BITTNER: It makes me feel like life is unfair.
ARNOLD: Don't worry. We are here to help.
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ARNOLD: The episode of LIFE KIT, we're going to talk about overdraft fees, credit card interest - the things that drain away your hard-earned money - you know like hagfish sucking on the belly of a whale as it's swimming by, which is gross. But so is paying a lot of fees. And this episode, we should say, originally published January 2019 - before the coronavirus hit and unemployment exploded to all-time highs. So we've added some bonus tips for taking control of your finances during this pandemic. So whether you're newly in debt because of all this that's going on now or you just hate paying these awful fees and you want to figure out a better way, we're going to learn how right after this.
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ARNOLD: I'm Chris Arnold, and I cover personal finance and consumer protection for NPR. And in this episode, we're going to give you six tips for setting up your bank and credit card accounts in a smart way so you just don't get hammered with fees and interest.
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ARNOLD: And there's an economist at the University of Chicago. His name is Neale Mahoney, and he studies credit cards, fees, financial markets. And he says you have to understand that banks make money from you in a way that's different from almost all other businesses.
NEALE MAHONEY: If I go to the grocery store and you go to the grocery store, none of us is going to be completely ripped off, whereas the banking sector - like, some people are going to get very little value and pay a ton in fees. It's just going to be a really bad situation for them, and other people are going to get a ton in value and are going to be smart about playing the game and not getting caught with overdraft or late or other fees. And so for them, they'll get a lot out of it.
ARNOLD: So you have some people who bank basically for free. It's like, look at all these free tomatoes. I'm going to stick them in my pockets. I mean, these people get free airplane tickets, credit card points, and they never pay a fee. And guess who's paying for all of that - the people who make mistakes - right? - who pay all these fees and interest. It's like billions of dollars that these people are paying.
And Neale says this may not be fair. But...
MAHONEY: If you can't change the world, you can only change your actions. Make sure you're one of the people who is not cross-subsidizing everybody else, that you're sort of playing this game intelligently.
ARNOLD: Yeah. And I think that's a great way to look at it, right? Just because you're not very good at this game right now, you can learn it, right?
MAHONEY: Yeah, I completely agree. Like, there's also simple things which will take you, you know, an hour on a Saturday afternoon. You only have to do it once, and it's going to serve you well for the next five years. Like, it's just making a small investment in getting your financial house in order.
ARNOLD: OK. So one of those small, simple things to get your house in order - and this is tip No. 1 - automation is your friend. So for your credit cards or anything else that you could possibly get a late fee on if you forget to pay it...
MAHONEY: Set up autopay so that when you've got a lot of other stuff going on, things are already in place and will take care of themselves. And you're going to save yourself, you know, the $35 fees three times over for screwing things up.
ARNOLD: Neale says you should pay your credit card bill in full every month on autopay because you never want to pay those super expensive credit card interest rates either. Right? Now, a lot of credit cards will give you the option of just paying the minimum automatically, which would protect against late fees. But...
MAHONEY: The one thing I would caution people against is if you set up autopay to pay the minimum every month, you might end up incurring more credit card debt than you plan to.
ARNOLD: Behavioral economists say we tend to stick with the default option, so that might mean you're going to just pay that minimum that's on automatic payments. So you really want to try to make the default to pay off the balance in full.
Now, some of you told us that you're worried about having things on autopay because that might overdraft your checking account. But there are some good ways to make sure that that doesn't happen. And that gets us to takeaway No. 2 - overdraft protection is overdraft deception. OK. That's, like, our catchy way of saying overdraft protection sounds like something good. But of course, the way this works - right? - is that the bank lets you overspend your checking account, often by just a few bucks, and then in exchange, it hits you with this $35 overdraft fee. And that can happen again and again and again.
I mean, if you looked at those fees as interest that the bank is charging to loan you that small bit of money for just a few days...
MAHONEY: The implied interest rate on that borrowing is huge, so it is not a wise way to borrow.
ARNOLD: So you just never want to pay an overdraft fee ever again, and here are a couple of different ways to make sure that you don't. The first - you want to open up a free savings account, and you can start out with just a couple hundred bucks in it. And then you link that savings account to your checking account. So if you overspend, the checking account, like, reaches out into the savings account and grabs the extra money that you need.
MAHONEY: So that if you make a mistake and overdraw your checking account, that money basically gets kicked over, and so you avoid the overdraft fee.
ARNOLD: And this all happens for free - at no charge. Problem solved.
Now, to keep money in the savings account, automation can be your friend there, too. You can auto-deposit part of your paycheck - whatever you want - 50 bucks, a hundred bucks - into that savings account every month to make sure that you've always got some money in there.
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ARNOLD: Another thing you can do is to link your checking account to a line of credit from your bank instead of a savings account. And the line of credit, if you pay it back right away, it'll change you, like, 25 cents in interest instead of that big $35 overdraft fee. I actually did this myself, and I haven't paid an overdraft fee in, like, 20 years - works really well. The line of credit, though, is a little bit riskier because if you don't pay it back, it could just turn into another big debt on your hands. So doing this with a savings account is probably the better way to go.
And that savings account we've been talking about - economists call that a buffer. And this is tip No. 3 - you need to build up this buffer account. Annamaria Lusardi is an economist and teaches financial literacy at George Washington University. She says there is Nobel Prize-winning research that shows that having a buffer account like this can be tremendously powerful and keep you out of all kinds of trouble.
ANNAMARIA LUSARDI: A small buffer goes a long way to work, kind of keeping our consumption a little less bumpy than our life and our income.
ARNOLD: Less bumpy. OK, let's think about it this way. This buffer account helps you absorb little financial shocks as they come along, like the shock absorbers on a car. So imagine now that you're driving in a car with totally busted shock absorbers. You feel every bump in the road. It's rattle, rattle, rattle. You know, other things break on the car. The fillings in your teeth are, like, rattling out. So living life without this buffer account is kind of like driving a car with no shock absorbers, right? I mean, any little bump in the road, and it's going to send you flying or something. Right?
LUSARDI: Absolutely. That's a great analogy. You know, like, that small amount of money can help us when we hit the bump.
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ARNOLD: The bump in the road might be you got to visit a sick relative, and the plane tickets cost 300 bucks. Your buffer account can absorb that. And this buffer account - I mean, this is not a new concept. In fact, human beings have basically been doing this for thousands of years. Neale says economists like him actually call this buffer thing a buffer stock. And he doesn't mean like stocks on Wall Street.
MAHONEY: It probably comes from what farmers did back in the day. They would hold on to, you know, excess grain in case there was some shock. And that was the buffer of the stock of grain they held in a silo.
ARNOLD: I kind of love that image because if you were going to survive the winter, you needed to set aside some grain and food and, you know, dried meats or whatever, right? We kind of got to do the same thing now. It's just that we have these very expensive workarounds, like credit cards and payday loans, that, for millions of people - they don't do this thing that we sort of evolved as a society to learn how to do hundreds of years ago.
MAHONEY: No, I think that's completely right. And look - financial innovation can completely substitute for this folk wisdom of the farmer who's hanging on to some grain.
ARNOLD: And during this pandemic, for the lucky ones of us who still have jobs, I mean, a lot of us are sitting on some extra grain right now - right? - I mean, some extra money because we're spending less. I mean, we've basically been locked in the house for the past two months. I've been staying home, not eating out, and my Visa bills are like half of normal. I'm piling up considerable amounts of money. I'm piling a lot of that into a buffer account. And so this can be a really good time to jumpstart this good habit. And frankly, none of us really know what's going to happen next, and any of us might really need to have a buffer account in the near future. Right? So be a good farmer. Get that buffer account set up.
Now, a lot of people use their credit cards this way. It's like, oh, I can't pay the dental bill. I'll just stick it on my credit card - whatever. But Annamaria says this is not what we should be using credit cards for.
LUSARDI: Relying on credit cards as a way to insure better against shock is not a good way. The best way to deal with a credit card is really use them as a method of payment, not as a method of borrowing because 20, 25% interest rate is a very high interest rate.
ARNOLD: So Annamaria is saying - and this is tip No. 4 - credit cards are for convenience, maybe some airline points. But they are not for spending money that you don't have. It's just a much too expensive way to borrow. And with a buffer account, she says, you don't need to use credit cards the wrong way.
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ARNOLD: Another reason that the buffer account's so important is that often these little financial shocks in our lives - I mean, a $200 bill - oh, jeez, I can't pay it - that can snowball. And just that one thing is like tipping over a domino, and people end up in a really bad place. We heard from a listener named Laura Bittner (ph). She moved back to Florida after her dad had a heart attack, and she wanted to be close to family. But money got really tight really fast. The first job that she found didn't pay very much.
BITTNER: So at one point, I couldn't even afford groceries, so I intentionally overdrafted myself. But that was a mistake because then, it started this cycle - like, a vicious cycle of overdrafting again and again.
ARNOLD: Her next paycheck would come. She'd already be 250 bucks overspent on her checking account plus overdraft fees. And her credit card started racking up late fees and interest.
BITTNER: So over six months, I was charged about a thousand dollars for the bank overdraft fees and the credit card fees. It makes me feel like life is unfair because somebody who can't afford food has to pay, like, a punishment fee.
ARNOLD: And you might think Laura paying a thousand bucks over six months is, like, some outlier, dramatic example that we just happened to find, but Laura's actually pretty typical.
SAFWAN SHAH: The average working American today is paying close to $2,000 every year in various fees.
ARNOLD: That's Safwan Shah. He's a Silicon Valley entrepreneur. But before that, he ran into some debt problems himself in graduate school. And lately, he's been researching just how much people are paying in bank fees, credit cards, payday loans, auto title loans - just all kinds of high-cost debt that can pull you into this vicious cycle.
SHAH: There is a leak in the boat, and something's draining your resources.
ARNOLD: And Safwan has our next tip here, tip No. 5, which is - before you get involved with any of these expensive debt options, if you're just, like, a few hundred bucks short for a car repair, you can try asking your employer to give you some of your paycheck just a little bit early.
SHAH: When you are stuck, I think the obvious option is to actually talk to your employer or HR and discuss that with them. There should be no shame associated with that. I doubt that an HR person would look at you and say you're a loser for saying that. I think that's just prudent. I want to avoid fees. Most likely, there will be someone with a human touch or a human reaction to your problem and there will be a solution.
ARNOLD: Actually, Safwan has started a new business that helps companies to do this for their employees. And some big companies, like Walmart, are already using it. But he says even if there is no formal system, it's always worth asking. And many companies are willing to give you some money a few days early for hours that you've already worked.
SHAH: You've earned it. If you need it, you should be able to access it.
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ARNOLD: OK. So we've been talking about a lot of ways to avoid fees and not fall into debt. But let's say at the moment you're already in debt and you're trying to bail out your leaky boat. You are actually in luck because we've got a whole LIFE KIT that's just about how to get out of debt. There's a bunch of good information in there, so definitely check that out.
But our last tip here is one thing you can do to plug some of the holes - or at least make them smaller. If you've got credit card debt and you're paying a crazy high interest rate, Neale says one thing you can do - and this is tip No. 6 - take advantage of what's called a balance transfer from another credit card.
MAHONEY: The way balance transfers work is there'll be - you'll get a credit card offer, often in the mail, which will say, you know, zero introductory rate. And there'll be a low cost for transferring a balance over to that card. And so what you can do is you might have a couple thousand dollars on a credit card with a high interest rate. You can balance transfer it over onto the card with the zero introductory interest rate and either pay it off or, at the end of the introductory rate period, try and balance transfer it onto a third card.
ARNOLD: Neale says you can set up autopay once you transfer the money to make sure you don't miss a payment, and that's really important because a balance transfer can be a powerful way to avoid those high interest rates, but it can also be really dangerous. This is not free money, and you need to work extra hard to pay this debt off.
MAHONEY: You should just be careful because people on the other side, you know, have calculated the numbers, and they know that even though they're providing you basically a loan with an almost zero interest rate that, for most of the people, they blow through the introductory rate period.
ARNOLD: Or if you miss one payment, the rate can jump up even higher than what you were paying on the original card.
MAHONEY: So more than half of people don't pull it off, but that doesn't mean you won't pull it off.
ARNOLD: So you can use balance transfers, but be careful. And look; to dig out of debt and escape this cycle of fees and interest, I mean, at some point, you're probably just going to have to knuckle down, live super cheap and cut your expenses. We have a whole LIFE KIT episode on budgeting that can help, so check that out.
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ARNOLD: OK, a last tip to help you financially weather this pandemic - if you've been hurt financially and you're a homeowner and you're struggling to pay your mortgage, there's something that that you can do. And this is really important. You want to call your lender and say, hey, I'm hurt financially; I'm having trouble here. I'd like to put my mortgage into a forbearance plan. And Congress mandated that for any kind of government-backed loan right now, including those backed by Fannie Mae, Freddie Mac, the FHA, lenders have to give you up to a yearlong break on your mortgage payments if you've been hurt financially. And you can look this up on Google - is my loan owned by Fannie Mae or Freddie Mac or FHA? It's pretty easy to find online. You just put in your loan number there.
And the thing is, though, that you're going to want to make sure to ask what happens after what's called the forbearance period, the time when you're skipping your loan payments. When that's over, some mortgage lenders are telling you - well, OK, you can skip three months, but then you got to pay it all back - all four months back at once. And then people are like, what? That's crazy. That doesn't help me. And honestly, that is kind of crazy. It's pointless, and that's not how the program is supposed to be working.
So you should tell your lender what you want to do at the end of the forbearance period is to shift those payments to the back end of your loan term so that, you know, if it's a 30-year loan, you pay them way down the road 30 years later. And when you're ready to go back to make your regular payment - I don't know - six months from now, whenever it is, then you could just get back to normal. And if lenders manage this right, that's what should be happening for the vast majority of people.
And along the same lines, if you're really struggling, call your credit card companies or other places that you owe money and find out what kind of relief that they can offer you. Some are allowing people to skip payments with no interest, but always ask a lot of questions and make sure you understand the terms.
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ARNOLD: All right. That was a bit of a diversion. But it's all in the name of preventing you from sliding deeper and deeper into unnecessary debt. And you know, I mean, getting out of debt is never a barrel of fun, but Annamaria says the whole point of following these tips and getting to a place where you don't have to pay all these fees is that life is going to be a lot less frustrating and stressful when you finally get there.
LUSARDI: The objective of saving is not to have savings. This is a happiness project. The objective is to have freedom - right? - to do the things you like or to achieve, you know, security or, you know, to be able to spend on a vacation, to be able to spend when you don't work, to be able to retire. The objective is our own happiness, our own well-being. And that's what I teach in my course.
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ARNOLD: We can't all take Annamaria's semester-long personal finance course, but we've covered a lot of ground here. So to help us remember the most important stuff, here are the key takeaways. First, tip No. 1 - automation is your friend.
MAHONEY: Take an hour on a Saturday afternoon, and put everything on autopay.
ARNOLD: Next, tip No. 2 - overdraft protection is not protection at all. It's a crazy expensive way to borrow a very small amount of money, so never pay another overdraft fee again. The way to do that is...
MAHONEY: Link your checking account to a line of credit or a savings account so you don't have to pay those overdraft fees, which are really annoying and they pile up. And you know, they're easy to avoid.
ARNOLD: And our third takeaway - this is very key - start building up a savings account - your all-important buffer accounts - to absorb those financial shocks that come along.
LUSARDI: It is very important for you to have a buffer stock of savings. Have that set aside so you will have a less bumpy road.
ARNOLD: Tip No. 4 - credit cards are for convenience; they're not for spending money that you don't actually have.
LUSARDI: Try to pay off your credit card in full each month. It's really expensive to borrow at the interest rates that are charged on your credit card.
ARNOLD: And No. 5 - if you get stuck with a car repair or you don't have a buffer account set up yet, try asking your employer for a little advance.
SHAH: Don't be afraid to go to the employer and ask for your already earned wages. You've earned it. If you need it, you should be able to access it.
ARNOLD: You can try a balance transfer to get one of those promotional 0% interest rates. But you have to be careful, and you have to be super vigilant about paying that off.
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ARNOLD: For more NPR LIFE KIT, check out our other episodes. There's episodes about how to read more books and how to get stains out of your clothes. I need help with that. I have children. You can find those at npr.org/lifekit. And if you love LIFE KIT and want more, subscribe to our newsletter. I'm Chris Arnold. Thanks for listening.
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