When I worked many years ago at a major chartered bank, I clearly remember that I was not of the few individuals not involved in the ESOP program. Essentially if you buy bank shares, the bank matched it with a 50% contribution to what I paid. Many people have called me (dumb) and in some ways they are right. I could of made a lot of money with the bank shares but in my heart I did not feel comfortable. Shortly I will explain why, but at Robert Floris’s Mortgage Architects office in Hamilton we view the client as valued. Today, I will write on how banks have clever ways to take your money. I always try to think if our roles were reversed, would I want to know this information.
Before we begin the list it should be stated that Canadian banks use a system called the Fractional Reserve system. Without getting into a detailed explanation, a one time deposit of funds of $10,000 could be lent out to nearly $100,000. These banks are not dumb. They will take the original $10,000 and will profit from it over and over again.
TOP WAYS THE BANK CLEVERLY TAKES YOUR MONEY
1. Discrepancy between what they pay for money and what they charge for it. We briefly touched on it above but lets run an example. Let’s say the bank pays you 1/2% of a $100,000 deposit, but charges 4.3% on a $100.000 mortgage. The bank earns $4300 and pays out $50. They make $4250 or an 8.5% return.
2. Fees for lines of credit
3. Special offers – a bank will offer a teaser rate (e.g. 4.99% on a credit card). This usually lasts 6 months and then the rate could go 18% or more
4. Overdraft Fees – overdraft fees can be within the 20% range.
5. Credit Card Fees – Always take a credit card with no fees and make sure you do not pay interest. Amex cards can be up to $2500 per year.
6. Checking Account Fees – if you do not hold a certain balance then you will be charged a monthly stipend.
7. ATM Fees
8. Account Closeout Fees – Closing an account costs money? Why? I’m not sure. I remember a client who faithfully paid out his mortgage. What was his reward? A $350.00 fee to discharge the mortgage.
9. Insurance products – The best insurance is to have term insurance in case of a death. These products which are given out to credit cards are some of the most profitable products.
I am not going to pretend that I am Mother Teresa, because I am not. However, I did leave the bank 16 years ago because I was not in agreement on how they pushed debt products. I was certainly correct in this as Canada has one of the highest indebted nations in the world. Going forward I will continue to educate my clients and worry about your families since the banks only worry about themselves.