The beginning of this article is a fairy tale that ignores what used to be one of the biggest drivers of revenue for banks: overdraft fees. Maybe the HN crowd has never been in a situation where they were auto-billed into a negative balance, which then caused an overdraft fee that then further drove their balance into negative territory, but this was a weekly/monthly fiasco for millions of Americans.
I was once in a meeting with one of the senior executives at JPMorgan, where the guy smugly told me he felt they were “doing a service for the community” by charging people overdraft fees. After leaving the meeting, my very senior colleague said, “I had to hold myself back from throwing that guy out of his window.”
These sorts of articles — half PR, half history lesson — tend to leave out these sorts of politically inconvenient but important bits of history. It’s so much work to unpack the bias...
It's not just overdraft fees right? It's overdraft fees plus transaction reordering which makes the magic happen.
I'm still kind of mesmerized on this one, it felt like regulatory action almost happened, the most lucrative of the overdraft practices got limited circa 2009/2010, and then banks voluntarily toned it down and the regulators mostly looked the other way on things like reordering?
The transaction re-ordering to maximize the amount of overdraft events should have put execs in prison. Out of all the obviously corrupt, mal-intent, direct consumer harming practices this was quite near the top.
In a French bank, I have credit transactions first then debit ones, in a Swiss bank, the contrary, I was shocked, especially that day, I did check my bank account to verify if I could proceed with a wire transfer, the following day, it shown a temporary minus amount but I didn't get an overdraft. So yes, fuck banks.
In Australia in 2010 I got a debit card for the first time in my life. The card would simply reject transactions. “As should be”, I thought. It was a revolution for me.
Revolut, Simple, and Chime, the three online only banks I have tried, all do (or did) this. It really helped back when I was living paycheck to paycheck.
For what it's worth; I banked with Simple for the better part of 10 years, but then they acquired by BBVA who was then acquired by PNC. That meant that all Simple customers had to go through account migration twice this year, and in the end now have all the typical fees associated with traditional accounts. Ultimately I decided to move to a local credit union.
I moved to One Financial, but I've kept a local credit union account as well. This probably makes no sense, but then again it's ok to feel conservative about banking.
It's worked out for me so far. The local credit union is one block away. I have not used it but there are no fees to just park money in a checking account.
I still don't know what happpens to such retail banking as interest rates go negative.
It wasn’t illegal, and maybe isn’t (although I thought it was). I know that I was impacted by this as a college student, and ended up paying hundreds of dollars in fees for a single weekend. I had OD protection fees and “bounce fees” for the “protection fees”. It was insane. However I thought this was at least made unprofitable by capping fees and limiting when they could be applied.
All of this insane behavior is a big reason why the CFPB was created, and legislation was passed to limit “overdraft protection” auto-opt-in.
Is that what banks would do? I faintly remember that really old accounts I had in Germany had overdraft capability, but for all newer(last decade or so) accounts, I had to explicitly request overdraft. I guess it was inherently more user hostile in the US. Although in German its not because of good service, but rather because banks don't trust the consumer.
The specifics of it are dependent on the bank, but it can be more insidious than even your example.
Given a balance of $100 and 4 transactions of $20, $20, $20, $90 you can either be charged one, or three overdraft fees depending on the order in which your bank deducts those from your account. Basically, ordering from largest to smallest will cause the most number of overdraft fees.
I seem to recall there being service levels at banks in Canada and maximum numbers of transactions per month until one gets hit with per-transaction fees. I was told explicitly when I opened my TD Canada Trust account there that it was imperative that I both keep money in the accounts and use them occasionally or dormancy fees would accrue (and if there was no money left, they'd then slam it with overdraft fees).
The benefit of US banking despite lax regulation was that there's a ton of different banks and credit unions to choose from. Some are great and some are shit. Literally hundreds to pick from. Canada there was like 5 big banks, a large credit union, and then depending on your area there was maybe perhaps a small community credit union.
UK banks are pretty heavily regulated. For example, the overdraft fee spiral has been banned and in many cases banks were required to pay compensation.
Yet we have quite a lot of banks to pick from - around 60 if you include building societies (more if you include private, niche and specialist banks). We also have a fair few new and digital challenger banks like Monzo, Starling, Atom, Revolut and arguably Metro Bank. If anything our banking system seems far more innovative than the US system.
I don't know about Canada, but clearly regulations don't mean that you can't have competition and innovation.
There are a lot of things that are just plain better in the UK compared to the US. Out of network ATM fees being a big one.
See also regulation about what the incumbent last-mile network provider (Openreach) can charge ISP's to provide services on their lines which has led to a larger number of ISP's available in any one place (unless you're in Hull, because of historical reasons).
I could be mistaken about this, but I thought it had something to do with the UK’s relationship with the EU (and perhaps the US, as well?) that made the UK particularly attractive to financial industry.
Totally agree, the Canadian banking system is a corrupt cartel the levies it’s own tax on every Canadian. This was made even more clear to me when I moved to the Netherlands and every banking fee was suddenly 1/3 as much as in Canada for the exact same service.
Here in Finland banking fees are a thing only for the poor (and even then we are talking about a total of 20 or 30 euros per year)
Basically every bank has some kind of "premium customer" program that you qualify for by having enough investments or loans from that bank and magically all your banking fees go away (obviously they just make their money from the services they provide for your investments/loans)
Banking fees? Never paid any as far as I can tell, not for the ordinary things. My bank here in Norway won't pay a bill if there isn't enough money in the account. It sends me a text and an email to say what happened and doesn't charge me anything.
The only fees I pay are a small percentage for management of mutual funds.
You are right I pay an annual fee for my credit card and debit card. No fees for using them or access to online banking. The bank is online only anyway.
Yeah that is what I meant. Basically having online banking + debit/credit card. Also for under 2X years old (depends on the bank) they are usually free.
It a uniquely American stupidity that somehow everyone just lives with. The concept of overdraft doesn’t even exist in normal consumer accounts anywhere else in the world. The first thing I do when I open an account here is to disable overdraft - but then you have to pay return cheque charges by whoever was trying to charge your account.
Overdrafts are very much a thing in the UK, most accounts allow it, but you have to request it in advance. In effect they work like a pre-approved loan, which at least when I was working badly paid jobs and needed food right up before payday was a very welcome feature.
With both HSBC and RBS if I didn't have an overdraft in advance they just hit me with an even larger "unapproved overdraft fee" — both refused to disable overdrafts & just bounce the payment instead
The history is that people used to write paper checks, and merchants would charge a bounced check fee. Overdraft _protection_ was actually a banking feature which would save you from the cost and embarrassment of a bounced check.
There is very nearly zero usefulness to overdraft protection in a real-time authorization world. Nobody charges a fee for a rejected debit authorization.
I suppose merchants might charge a return check fee for a failed ACH payment, but nobody uses ACH payments for anything routine in the US.
> nobody uses ACH payments for anything routine in the US.
Water bill, electric bill, mortgage, and property taxes are all ACH for me. Many people pay rent that way. I don’t think it’s commonly used for day to day interactions but a lot of payments are still ACH
The latest thing I've noticed is that if you attempt to debit, say, $100 from an account that has only $95, it will successfully debit $95 and then the POS equipment will show that you still need to find some other way to pay the remaining balance. Used to be in this situation it would just be rejected outright.
It's more handy for gas pumps, but less transparent. It stops before your tank is completely filled, but doesn't say why. You can hear the difference if you are standing there while it fills, of course, but other than that you may be confused why it slowed down and stopped exactly at a certain amount and won't go any farther.
Netherlands has overdraft if you request it, otherwise the payment would fail / card declined. But we don't have overdraft fees, that's the weird American thing that caused all those crazy optimizations like reordering transactions.
The way it works in NL is you pay a (high like a creditcard) interest rate for every day the account is below zero. The transaction order doesn't matter it looks at the balance at the end of the day and charges you 1/365th of 13% interest.
The only way banks fuck you over in this system is with the dates. Using a card means a transaction date of "today", getting paid almost always has transaction date tomorrow. So you end up paying 1 day of interest. Much less than a $ 40 overdraft fee and regardless of the number of transactions.
Yes, that's exactly what they would do. Even better (for the bank's profits) is if you had lots of other smaller transactions that day too. They would re-order everything from largest-to-smallest, so it's:
1. have $10 in your checking
2. pay $9 for steak
3. buy sausage for $5
4. charge overdraft
5. buy milk for $3
6. charge another overdraft
7. pay $2 for parking
8. charge another overdraft
9. buy a pack of gum for $1
10. charge another overdraft
11. count $500 deposit
It was truly despicable behavior that benefited nobody but the banks.
I may be wrong, but I think this is now illegal in the US. I haven't heard of it in a while, at least. But it's also been some time since I left little enough in my account that it could happen to me, or banked at a shitty bank that would even do it to begin with.
Banks "voluntarily" stopped doing it once regulators got serious about forbidding it and then the regulations never actually happened, so while it's not currently a thing anyone does it probably will be again some time in the future.
And of course even if you deposited a check that day it wouldn't clear until the next business day so you'd pay a negative account balance fee for three days before your money hit.
In this sample, if overdraft is enabled, you pay up to 15% p.a., if disabled the cancellation fee is up to 2€ for the postal notice, but mostly just porto (0,80€).
My German back account has overdraft, but that only charges via ~12% annual interest (billed at end-of-month, but charges proportionality if you've been in the red for part of the month).
Also note that for ATMs (including deposits) and within-bank transfers, we had no more than a couple seconds latency since €, which got expanded for all willing banks to cross-bank push transactions specifically requested to be "SEPA instant push".
The "SEPA instant push" transactions have some issues with reversing in case of accidentally fat-fingering IBAN (target account; like a crypto wallet address but no crypto) or amount. Once the money is in the target account, you basically have to go to court if it wasn't outright fraud. And being instant removes the window you had to call your bank and cancel the transfer. IIRC there are some further liability shifts.
And yes, this transparent interest-based handling is why we get by perfectly fine without credit cards.
You cannot have law as a list of specific cases: it must be based on patterns - "All arbitrary appropriation is forbidden and sanctioned", then further made into distinct categories to substantiate and differentiate the amount of gravity. All theft is illegitimate.
When the transactions 'arrive' in the bank's system should be immaterial, as they should be timestamped at the moment the card is swiped, matching the date and time the printed receipt I am handed has.
Regardless, the bank's mission is to make money, and they can make a lot more of it by adversely reordering transactions in their favor, it is not at all a reach to assume that they do so, and in fact have done so and may well continue to.
Yea. For people who aren't familiar with this, the bank will reorder your transactions and batch them to do the biggest one first. Then you get charged an overdraft fee per transaction after that. If they did the small ones first, you may not go into overdraft until the last big one... So you'd pay one fee. Do the largest first, then each small one causes a fee.
In 2004 I was traveling around Europe as a 20 year old. Spent my debit account down to my last $20. I had a flight from Barcelona back to Boise and the airline had supposedly issued a paper ticket, not an e-ticket. Long story short, if I couldn’t produce the paper ticket, my flight was going to leave without me. I didn’t have a credit card and I knew I was out of money but I said what the hell, try my debit card to purchase a new flight. Lo and behold, it went through! I came home and a week later my account was -$5,500. Wells Fargo had taken the last charge, the $900 flight, reordered it and I accumulated $4,600 in overdraft fees. I’ve never been so angry in my life. They did not fix the charges, and I got bailed out by my mom. I plead my case over and over but everyone, including my mom, just drew it up as an non-responsible college kid.
Every time I tell this story it makes my blood boil.
Ha I had the exact same experience with Wachovia bank in New York City once and basically their argument was on the lines of “The highest value transaction was probably the most important for you so we ordered it by price so that your most important transactions go through first”.
In a way though I feel like the American system is set up to traumatize you for being poor so much that you develop the thirst to become a millionaire one day when these things don’t affect you.
Poster probably had a series of small transactions from travelling ($5,12$,$13 etc). The bank moved the $900 to the front of the payment queue, and then every one of the smaller transactions cops the fee.
It wasn't 500% of 900, it was the sum of the overdrafts on all the previous transactions.
For ~4k-ish of overdraft fees assuming ~$40 per single overdraft, they'd have to have hundred-ish transactions, sounds like a lot transactions (or the overdraft fees getting exponentially bigger with each one?)
I was tooling around Europe for a few weeks before I left and was using my debit card everywhere. 1 euro coffee, beer here, beer there, it all added up. For whatever reason, the overseas transactions didn't clear as fast as a stateside one usually did. I imagine it was like a weeks worth of transactions. 12/day isn't really crazy when traveling but it's been so long, the only detail I really remember was the final blow.
The argument, which I do not buy as sufficient but add here for completeness, is that it’s better for your large purchases (ie rent) to clear before your $10 lunch, etc.
I remember this happening to me when I was a broke college student over a decade ago. I had to pay some bills and buy some things, and I expected a single overdraft fee, as I knew my exact account balance and the order of the purchases. I remember being hit with 3 (maybe 4) overdraft fees and immediately called my bank for an explanation. They gave me some bs like, "We reorder transactions to make sure your large ones go through first since they're probably more important." It was obvious at the time what they were really doing and why, which led me to eventually close my account with them and go with a local credit union.
My last bank (US Bank, don’t bank with them) did this in a way where in one day where I had only one transaction which could overdraft they charged 6 overdrafts even though my net would have been positive. If I wasn’t (at the time) skilled at ~~kicking and screaming~~ advocating for myself I would have been out $180 plus whatever 30 cents they had calculated I went negative. Which (again at the time) was the difference between whether I was gonna be homeless.
Oh since I’m naming names. The bank before that, Wells Fargo, honored a check I wrote > 2 years earlier. Sure, I wrote it and I was good for it at the time. I forgot about it. Maybe I could’ve left that money in limbo but at a certain point I assumed my moderately wealthy aunt wasn’t gonna cash it.
Well it doesn’t matter what I assumed, the law said the check was no longer valid. When Wells Fargo honored it and overdrafted me they disregarded the law and said I was committing check fraud if I didn’t pay up. That’s how I ended up at US Bank, because fuck if I’m going to pay you for illegally processing my check.
Edit: and yeah I had “check fraud” on my record for years after because Wells Fargo said they didn’t care about the law and just lectured me about being responsible for checks I wrote.
Wasn't there some money to be made for you and the Lawyer? Sue the bank, make lots of noise, then offer a settlement in which they pay the lawyer and some amount of damages for getting your credit score in jeapardy.
Okay this is absurd. I was being wrongfully overdrafted. I had no legal recourse. No one being overdrafted has any legal recourse unless they’re researching overdraft abuse.
The lawyers I could hire are advertised on billboards and park benches on spin off TV shows.
Probably ChexSystems. Kinda like a credit report, governed by the same laws, but distinct from the big three bureaus everyone is familiar with. All the banks use them. And anything negative on that report will prevent you from opening up an account somewhere else until you get it removed.
Oh man, I banked with US Bank back in 2003/2004. One day I overdrafted my checking account by about $5. "Overdraft protection" kicked in and they automatically transferred money from my savings account, but not before charging a $25 fee that caused... another overdraft. This repeated automatically over a dozen times in one day to the tune of around $300. I noticed what was going on that evening and manually transferred some extra into checking to stop the cycle.
The next morning I went in to sort it out and was told I needed to travel an hour away to the branch I had originally set up my account at. Upon arriving at my "home" branch I was told the manager was on vacation and no one else could help, but she would call me as soon as she got back. Two weeks later, having received no call, I went back in and saw the manager sitting at her desk. I closed all my accounts on the spot and never looked back.
There're several of stories of some level of craziness here in the thread. I wonder why none tried to sue bank? Are banks in the US really above the law? Or probably not too high to be sued, but enough to make good money.
Lawyers cost money. There are a lot of bad actors in the US that know they can get away with stealing small amounts from people because the legal costs will quickly eclipse any returned gains.
Anyway, in my case the bank did ultimately return my $300 as they desperately tried to retain my business. Pretty sure this is another way they get away with stuff like this, just refund the squeaky wheels. "Oh, sorry for the mistake."
Thanks for reminding me about reordering. There were (are?) just so many dirty tricks. It’s been a couple years since I’ve lived in the US, so I am not aware of what things look like now — hopefully others can comment.
I remember getting hit by reordering when I was in college, getting by on a coffee shop job. The bank ordered a group of concurrently unresolved deposit/withdrawals to maximize the overdraft fees (I think I got hit with ~3x $35). It seems silly now but when you're making $5.25/hr, going more than $100 in the red really stings.
Sounds like one of those "Look! We came up with a voluntary code of conduct, so your regulatory body can stop investigating necessary regulations, we've changed honest, so please feel free to have a triumphant press conference and congratulate yourselves without actually holding us to account."
Long back when I worked in my first job at a large private bank, I remember being in a meeting where they spoke about overdraft fees + late fees + interest on these + god knows what else and the lady, our systems counterpart, looked at all of us and said 'We better plan a trip to Ganges to atone for all this and we might need to go ever year' (it's a common saying in India, as Ganges is supposed to wash away one's sins)
It's been 16 years since I worked there but I still remember this vividly. Modern banking has to be one of the biggest scams legally running and once you go below the prime segments, it's basically just exploiting the poorest and weakest to make some of the easiest money you can.
around my neck of the woods the most common banks, like bank of america, regions, fifth third - afaik - all charge over draft fees.
not sure that late fees or interest fee apply, unless you consider things like paying BAM late on a mortgage payment - surely has a late fee.. perhaps if you have one of those account like. free checking so long as your balance stays above 1500 or/and you use your debit card 15 times a month to push fee onto retailers.. if these are not met you could say it'd be like a late fee.
I've seen news stories that have discussed discovery of some banks structuring debits to an account with the same 24 hour period that would cause an overdraft.. so take out all the payments and then apply your deposit after those are settled - now that is super extra shady.
personally I'd just prefer them to bounce back and refuse a payment if there was not enough money in the account. Although I was charged for a bounced/bad check someone had given me at one point, so I'm guessing they could find a way to charge for similar.
Maybe I am missing the qualifier in "'private' banks" in that statement - but I've seen a lot of people pay a lot of overdraft fees and have accounts closed for them, not sure what "private" banks don't do such things, or how common uncommon.
I think this is a dialect difference. To me (and presumably the parent?) private bank means a bank that offers private banking services to wealthy clients which generally involves selling certain loans or investment products rather than a current account. Whereas I think the grandparent meant “bank not owned by the state”. But I’m not entirely sure
Had five years or so of that awful cycle. It’s interesting when you meet people who haven’t experienced living under the brutality of the banking system. Overdraft, payday loans, high interest credit. They think it’s all fine. Fear of overdraft fees is a real class divider. One thing I really remember is being absolutely broke, and a guy from the bank calling to see if I’d be interested in taking on a credit card “we think it’ll help you out right now”, I’m so glad I didn’t.
I think the same people also fail to see the passionate drive it generates, I’ve been working in crypto a few years now and there really is a shared hatred for the big banks, with many people feeling abused by those systems. The result is a lot of politically driven people, who now also have raised funding for the next few years, who’s goal is to make those places irrelevant and create as many other options as possible.
It seems to be a common theme that the ones who have been screwed by the banks or are currently being screwed by the banks are cheering for cryptocurrencies, while the ones with no experience of getting fucked themselves keep asking "But what problem does cryptocurrencies really solve? Seems useless to me because banks do the same thing"
If cryptocurrencies were actually being used significantly as currencies, you might have a point. My skepticism of cryptocurrencies has nothing to do with how they replace banks, because they flat out don't replace banks at all. Or rather, the extent to which they do so is trivial. I mean, if they were taking significant business from banks, wouldn't you think the banks would be lobbying to have it banned? But no, instead they think it's wonderful because it's another highly volatile new asset they can trade and provide services for.
I'm sorry, but the idea that crypto is sticking it to the man by disinter-mediating the banks is a crypto-cult delusion.
The invention of cryptocurrencies (specifically Bitcoin at least) is not to replace banks, but to replace the way transactions happens. A normal bank transfer involves contracts and processes to make sure everyone that handles the transaction is honest. You basically put your trust on contracts that the transaction will actually go through. Bitcoin replaces this need of trust in the contracts with need of trust in the protocol that can be inspected easier than contracts that are most often private, at least that's the thinking.
> wouldn't you think the banks would be lobbying to have it banned?
There are plenty of examples where the banks in a country no longer accepts transactions from/to cryptocurrency exchanges, Sweden being one example where it's basically impossible to deposit/withdraw SEK/EUR to your bank if they think it has anything to do with cryptocurrencies.
In a ideal world, cryptocurrencies are as protected as normal currencies, and the need for banks are still there as not everyone will run their own node and have custody over their own wallet. Banks adds extra security, something some people want.
Problem becomes when you start thinking that one solution applies for everyone. Cryptocurrencies, just like normal currencies, doesn't work for everyone. People should be free to choose, without being banned left and right for arbitrary reasons. Try getting through banks fraud departments when you make transactions from/to countries like Nigeria, and you'll know what I'm talking about.
> The invention of cryptocurrencies (specifically Bitcoin at least) is not to replace banks, but to replace the way transactions happens.
This is a wonderful hypothetical in much the same way as spherical cows, but in the real world today, crypto is treated as a (quite volatile) speculative asset, not a way to transact everyday business. The world does desperately need fast payment processing that doesn't involve companies like Visa or MasterCard skimming off the top every time to enrich themselves and dictating one-sided terms to others (hello, OnlyFans), but I'm not seeing any evidence that crypto is poised to handle that. It's too risky. And the compatibility layer with legacy currency is too unwieldy: Every time you convert to regular currency you generate a taxable event, which is fine if you treat crypto as akin to a stock, but it'll make tax time hell if you're buying groceries and lattes and gas with it. It's not impossible to pass laws to make the best-case for crypto happen, but that would require a lot of political will that I just don't see happening; too many people benefit from the current system.
If there's a cryptocurrency that solves those problems, please let me know, I'd be interested to hear about it. But the current players all just seem like speculative bubbles for wealthy techbros to play around with. Many of which are driving electricity consumption for mining, which has, shall we say, some environmental downsides.
The restrictions on crypto are coming from regulators, not the banks, and the reason regulators aren't happy is due to the volume of criminal transactions, tax avoidance and scams enabled by crypto.
The reason the banks don't care is because at both ends of most crypto transactions you will find, er, a bank account. Crypto is only useful to the extent that it has real currency value, those Nigerian scammers and many others using crypto for transfers are just using cyrpto as an intermediate step to avoid pesky laws. That's fine as far as the banks are concerned because that's more money flowing into their systems.
I ask that question, not because I haven’t been screwed by the banking system, but because everyone I see in the crypto space is out to screw people even harder.
Your comment presupposes that crypto solves the problem of perverse incentives. Really, it just worsens them.
Even worse, they batch transactions by the day, and reorder them highest debit first in order to maximize overdraft fees.
So if you spend $5, $5, $5, and $40, in that order, with $38 in the bank, instead of getting one $35 overdraft fee, you get 4. It's the difference between a balance of -$52 and a balance of -$157.
I once worked at a bank where they had for a period doublecharged people for overdrafts, driving them into further overdrafts even after deposits clearly intended to cover those overdrafts had been made. The cheery low-level administrators loudly resented that they had to refund the overcharges at all, because people who kept their accounts that low were obviously deadbeats anyway.
I got hit by this two separate times in the early 2000s before I learned it was better to withdraw whatever cash I had left. I was already stuggling, living out of my car, and having additional overdraft fees on top of the one I expected was devastating. It literally left me unable to buy food for days, because each overdraft fee was $20 IIRC.
I'm shocked that the transaction reordering is still a practice nearly 20 years later.
Overdrafts were the second thing that came to mind, a decade into clawing my way out of poverty and just plain being broke.
The first was the scam of debit cards and secured credit cards being treated fundamentally differently. They both operate basically the same way for customers (you’re only spending your own money, it’s not credit in the lending sense), but debit cards are a profit center with no credit reporting for the customer and secured credit cards can be recommended or not in any discriminatory way anyone wants (which they are).
What do you mean by secured credit cards can be recommended is any discriminatory way? I definitely think the nation should prioritize financial literacy in the education system, but I'm not sure you should be trusting any information you get from a bank regarding what to do with your money.
What I mean is that for customers, secured credit cards and debit cards have roughly the same risk, but banks have obligations to offer checking accounts fairly but offering the equivalent credit-building account is up to their own discretion. It’s considered lending even though they’re lending the customer their own money.
Do you feel that the "discretion" violates the equal credit opportunity act? Technically, credit discrimination is illegal, but I could see a bank taking liberties with people who don't have the means to protect themselves.
Given that the risks to “creditors” (banks lending money back to people who own that money) are equal for debit and secured credit cards, and that the risks to “debtors” (people who would be using their checking account to build a neutral-at-worst credit history)…
Having the means to protect yourself is the baseline definition of a secured credit card. That’s why it’s secured. You’re starting with some positive balance and spending your own money. That’s what debit cards are too. The liberty banks take is choosing who gets to benefit from their normal spending of their own money being considered as credit at all.
Well they work like debit cards in a way, you can't overdraft and you build credit with it. It's what's recommended for newcomers to the US. But I'm not sure they're really the same given that your credit limit will be as high as the spare amount of money you can keep as security in your bank.
0. for many aspects of life you need positive credit history to live at all
1. debit cards don’t help you build credit
2. secured credit cards (your own money! not borrowed!) do
3. both function almost the same way, but the latter is much less equally available
And if you think “living on borrowed money is a fraud”, I suppose that means you think only independently wealthy people should own homes? Nearly no one could afford to buy a home anywhere without a mortgage.
That's a kinda chicken and egg problem. I could argue that the more financing you give to people, the more they're gonna be willing to pay, so this actually drive prices up.
I'm really confused about those overdraft fees (or rather overdraft interests). My bank has also charges overdraft interests, they are currently 6.99% p.a. So if I get into overdraft due to one payment but money comes in on the very same day it shouldn't be that much interest I have to pay to the bank.
For an overdraft of 100 euros it should be like 2 cents for a day.
This and the glee of executives over systems that increase the potential for overdrafts or charge backs is why I’m glad to not be in banking anymore.
One of my most memorable conversations was with a rep from one of the core processors about how she makes it her mission to make sure everyone in her family opts out of overdraft protection.
Banks spend so much time on the wording to make it sound like they’re doing you a favor, I’ve had to convince my wife not we didn’t want it.
That seems like yet another PR piece that revolves around a, “look, finance didn’t need regulatory action to fix itself, it just needed ‘innovation!’” narrative. No, sorry, these markets were created by regulatory action, and they still need regulatory action to fix the flaws in their design.
I found patio11 to be more informative before all of his writing suffered from a Stripe bias. And I found Stripe more interesting when it wasn’t trying to be the Microsoft of finance.
Edit: And so people understand how these two things — abusive banks and Stripe — are connected: revenue-envy among large corporations trying to move up the ranks and attract bigger valuations almost inevitably leads to “innovations” that are bad for the customer / community / whatever. All roads lead to Rome.
The whole criticism of wildcat banking is so myopic imo.
Laws were set up that explicitly made these banks very weak. Then after they inevitably failed like they were set up to do, everyone goes "omg, look! private money is so bad! time to nationalize banking and regulate everything!".
> Maybe the HN crowd has never been in a situation where they were auto-billed into a negative balance
I wonder about this some times. It's truly not something I wish upon anyone, but at the same time it's almost a privilege to have live it first hand, as it's an...I was gonna say "unfortunately rare" but I think I'll go with "severely under-represented" point of view in this industry, especially silicone valley.
Also yes, overdraft fees are truly disgusting. What's worse is that there are transactions that can bypass "overdraft protection"
> Also yes, overdraft fees are truly disgusting. What's worse is that there are transactions that can bypass "overdraft protection".
Totally agree. I used to work in the lending team at a UK bank. Someone on my team was on a panel discussion about change in banking, and gave a brilliantly frank answer on that point: https://youtu.be/M3toHjAABvw?t=3511
> it's an...I was gonna say "unfortunately rare" but I think I'll go with "severely under-represented" point of view in this industry
I do remember being disturbed by this. I'm from a totally privileged background myself, probably quite a bit more than the rest of us were, but still, something about watching that 'total amount lent' line increasing, it just never sat right. It felt ... profane, like a funeral director cheering because there were more car crashes this quarter. It's hard not to mentally flip that profit graph upside down.
And I'm glad that our industry is working harder to be diverse in gender and ethnicity and sexual orientation &c, but it feels like diversity in social class is still horribly neglected. It makes such a hugely palpable difference to have even one person in your team whose parents might be among the people you're lending to (or whatever it is that your company does).
I honestly don't well enough understand the sociology of software engineering to fathom why we're so silent on that particular dimension of privilege.
> I honestly don't well enough understand the sociology of software engineering to fathom why we're so silent on that particular dimension of privilege.
I suspect that, much like much of STEM, computer science requires education, which poorer folks will simply not have nearly the opportunity to even attempt.
When you come to America as a student, the first thing the other international students tell you is that you turn those off when you get a bank account.
Easy access to cheap credit is one of America’s best things but this is expensive credit. You don’t want it.
This was the story of my parents lives when I was growing up. They constantly paid these fees and they constantly were under water financially. I never forgave the banks for this. However, my parents were also to blame - they simply were unable to manage their finances.
This happened to me once, at BofA, before web-based and app-based banking so you only got verification that things were what you thought they were when you got your monthly statement, went to an ATM or teller, or used a cumbersome telephone interface via a touch tone phone:
1. Initial balances: -L on BofA credit card, 0 on checking account, S in savings/investments. When I write a check I transfer money from savings or investments to checking to cover it.
2. I attempt to pay my credit card bill in full by check, but I don't get the money transferred to the checking account in time to beat the check.
3. Overdraft protection on my account kicks in, which was backed by the credit card and treated as a cash advance. That did the following:
3a. Transfer L from credit to checking
3b. Charge overdraft fee O to credit card
3c. Charge cash advance fee F to credit card
for cash advance of L+O+F
3d. Transfer L from checking to credit card
Note that the credit card balance went from -L to -2L-O-F from 3a through 3c, then to -L-O-F after 3d.
Since the credit card always had a debt of L or more on it during all that, an interest charge I for not paying off the card completely during that month was changed.
I didn't find out about this until my next statement, where the balances were: -L-O-F-I on credit card, L on checking, S-L in savings/investments.
I found this absurd and irksome for two reasons.
1. If it had been my Discover card or my Capital One card I was trying to pay off, the card balance would have ended up at 0 after all this so I wouldn't have incurred interest charges. This would have been a lower net cost than what happened.
2. My BofA card included allowing skipping the minimum payment every so often with no late penalty (it would still accumulate interest on the unpaid balance of course). If I had NOT had overdraft protection, what would have happened is that when the check bounced due to my savings/investment transfer not making it in time, I'd have been charged a bounced check fee B on checking, my "skip a payment" would have been used on the credit card, and my next statement balances would be: -L-I credit card, L-B checking, S-L in savings/investments. This would have been a lower net cost than what happened.
Writing a check for a balance that isn’t in your account (step 2) is called “kiting” and is a relatively minor fraud. In general, one should avoid doing it regardless of overdraft fees.
Fun fact: when you get money in and money out the same day on an account, some banks count the money out first, so that they can charge you for a possible overdraft
Yeah, that’s why eventually paid 5 bucks a month more for an account without an overdraft facility, meaning any negative transactions would be rejected. I can’t believe this isn’t the default.
Not “used to be” unfortunately. American banks took in somewhere between $9-15 billion (depending on source) in overdraft fees in 2020. It’s super gross.
I believe the argument in favor of overdraft fees is that they are essentially extending a line of credit at the moment the customer needs it. As opposed to just denying the transaction outright. I had this happen to me once well over a decade ago, and I argued with my bank to make it so I would just be denied if it ever happened again. They acted shocked as if most people would rather go into debt than be denied.
There is Congressional testimony somewhere on this topic that provides their talking points. They were scolded without being actually punished, if I remember correctly.
"half PR" & "politically inconvenient" are an unnecessary assumption of bad faith. Patio11's not doing PR or propoganda.
Disagree and/or add to the discussion as you see fit, but let's try to be a little more generous... especially to a member with such a history of contribution to the community.
An employee of a multinational financial services company writes a historically revisionist article about an area in which his company has direct regulatory and financial exposure.[1] With only implicit disclosures of conflict of interest. I would say that it is only because of the author’s long-term goodwill in this community that this stuff isn’t looked upon with a very critical eye.
I’ve learned the hard way that someone’s past identity does not necessary correlate with good behavior in a new, more “important” persona. Silicon Valley is filled with examples of exactly this sort of thing.
1: Remember, the former Governor of the Bank of England is on his employer’s board. This isn’t a passionate evangelist for a struggling startup charity case, or someone telling us cool facts about their weird hobby.
I don't see how we can get anywhere discussing like this. Instead of discussing the topic, it's all meta. Ad hominems, characterizations of the argument and accusations of bad faith.
As I said, disagree and make your case. You don't have to assume credibility, but don't assume malice. What's the point of having a discussion if it's not a good faith discussion.
Yes. The “big banks lost money servicing the poor people” narrative is totally wrong, and the author knows this. We can’t let this incorrect story get more traction than it already has. Too many innocent people suffered great hardships in the real story of what happened — look at the stories in this thread!
> What's the point of having a discussion if it's not a good faith discussion.
> Typically, the apps offer their users a choice: payouts at the speed of banking, for free, or payouts at the speed of the Internet, for a small convenience fee. Cash App charges 1.5% with a minimum of a quarter.
This is just another way the financial system (including fintech startups) preys on the poor. If you are well off, you wouldn't want to pay any convenience fee for the privilege of receiving money from a business a few days earlier. In fact, you can think of it as interest: from first principles if someone delays a payment to you, theoretically they should pay more because of interest; now if you opt for waiting 3 days and saving the 1.5% convenience fee, you would effectively earn an interest of 1/(1-0.015)-1 = 1.5% in 3 days. That's not even an annualized figure. If annualized it would be 1.5%/3*365=122% implied annual interest rate. No one in their right mind who does not have cash flow issues would opt for receiving debit card payments with such a fee.
> Many report that it transforms the nature of their interaction with the underlying application; delivery driving for casual drivers becomes something that you can burst up to fill an immediate cash need or mentally allocate against a particular desired expenditure (e.g. “Drive for 3 hours to afford a night out starting immediately after you log off.”)
If your cash flow is not an issue and have credit, this is how you would handle it: let's drive for 3 hours, receive the full payment amount in a few days instead of immediately, and put all the charges from the night out on a credit card, whose bill will become due in a month or two, with no interest. But the poor doesn't have a bank account or a credit card, so they suffer. They pay more in fees. That's the injustice of the system.
It's also another illustration of how backwards US payments infra is. In the EU, SEPA instant payments are just that: by law it can take a maximum of 10 seconds for the recipient to get paid, including across countries. And, of course, they're free.
The US Federal Reserve is building an instant payment system (FedNow) that goes live in 2023 [1] [2]. Payment providers are moving upmarket and to features that stave off churn (my analysis here) due to expected revenue destruction caused by a free alternative being available (a US version of SEPA). This is alluded to in the second half of this blog post.
If payment revenue (interchange and the like) declines, and net interest is insufficient for providing large swaths of US deposit accounts, something is going to have to give (community and megabanks have a ton of pull in Congress, and neobanks are beholden to someone with a bank charter).
I’m not in payments (but in adjacent financial services), so I’m happy to be corrected if any of this is wrong.
The Durbin Amendment to Dodd-Frank capped debit interchange revenue. Bank of America responded by raising the minimum balance to qualify for no fee checking to $1500.
I don't know who supports it but I frequently wait days for SEPA transfers without seeing a more instant option in Germany. Occasionally it is instant (e.g. to those using my own bank) but I can never rely on it.
Technically the regulation says that charging is allowed, it just has to be the same flat fee across the entire SEPA zone, whether it's domestic or international. Most banks found domestic fees unpalatable, so they just made everything free. In this, as many other things when it comes to e-payments, Germany seems to be a bit of an outlier.
I mean, it's the same over here in Portugal as well. SEPA standard transfers are free, but SEPA instant transfers have a flat fee in every bank (Unless you have a sort of premium account)
Yeah but the bank won't perform them at different hours of the day.
So the transaction is practically instant, but the waiting time before the transactions starts (after you authorize it in the app) can be hours. Or instant, if you wish, for a fee.
> This is just another way the financial system (including fintech startups) prey on the poor.
This is the way a government preys on the poor by not making electronic transfer of money a utility.
The businesses are just doing business, no one sets out and says I want to screw the poor. The prices simply reflect the risks to the business. If society wants to subsidize those risks for the poor, then it should by creating a utility that allows quick and free transfers of money, and for all people to have free accounts.
Actively doing harm because nobody stopped them doesn’t absolve them, regardless of government passivity. In fact, doing it for that reason might actually make it worse.
Neither is compelling others to behave in a way that you, particularly, think is morally justified, and trying to lobby to have them forced to comply.
Working for a business that doesn’t also happen to be charity isn’t neglecting the needy. Charging rates that fairly reflect the value of your work isn’t malice to those who can’t or don’t want to pay your rates.
You are right, but "it's just profitable and not illegal yet" is how we get all kinds of negative externalities, like dumped waste into rivers and this borderline usuriousness. I think it's worth regulating (but carefully)
I took a look through glassdoor reviews of stripe as a result of his pitch at the end - lots of complaints about work-life balance / being overworked. Any stripe engineers want to weigh in on that? Are there areas of the company that are better than others?
Stripe is 12 years old, has ~4,000 employees, and does several billion in revenue each year. It’s not a startup anymore. Although I do agree with your general sentiment that if you want real work-life balance, an actual startup is probably not for you.
I disagree with both of your statements. Hypergrowth is a meaningless term and a startup is a type of company in a specific stage of its lifecycle. Running a company "like a startup" can be a thing, but that does not make the company a startup.
Based on my experience at Amazon, I believe this is something you hear at megacorps that are in denial about their current operating procedures and also don't understand how a startup operates.
> “This user might very well have somewhere on the order of $2,000 of debit card transactions a month. This implies about $300 a year in interchange revenue”
There seems to be a mistake in the math above. It’s not $300 a year in interchange revenue. It would be closer to $12.
Interchange in the US for credit going to an issuer is around 125 bps (and that correlates to the $300 calculation).
But the US is highly regulated on debit and interchange is around just 5 bps for debit. Making the yearly debit interchange revenue to be ~$12.
Which means this account holder in the illustrative example is still a net loss for the issuer.
EDIT: I just finished reading the article. It’s even called out at the end of the post that debit interchange is much lower. I’m confused now how patio11 did his original math knowing he’s aware of Durbin.
It makes sense to me, since it’s in chronological order. If you read the whole article, you get the whole and up-to-date picture. Also don’t forget the exemption for banks with less than $10 billion in deposits - presumably that’s pretty relevant to a lot of his readership, given fintechs and how they partner with community banks on this.
Use credit card, it’s the card issuers that are on the hook for fraud. It’ll help you build credit. Use debit when you don’t have the means or credit history.
This is a strong US vs the rest of the world difference. In the UK for example most people will do their day to day spending on debit because the rewards we get aren’t worth the faff of paying for things a month later, when you are less “flush” (Americans just seem to have a lot more money sloshing around compared to even well paid Brits and Europeans) it’s much harder to manage that monthly offset from salary payment to credit card falling due and when the rewards are so paltry it’s just nit worth the faff. Only one of my friends does any regular spending on a credit card and he says “it’s Amex so it’s worth the extra faff but only just”
> most people will do their day to day spending on debit because the rewards we get aren’t worth the faff of paying for things a month later, when you are less “flush”
This sort of thinking misses the point that even with credit cards you don’t spend what you don’t have. You (ideally) treat it like a debit card. If I spend $100, then I’ve $100 less in my checking. If you do that, then “flush” never enters the equation.
Poor choice of word on my part I think. I don’t mean flush in that the following month you have more money but that in general Americans have more money and so are less susceptible to the ramifications of miscalculating. I’ve had a couple of long conversations with Americans about this topic of credit vs debit and the cultural difference is so strong that we inevitably can’t reconcile each others point of view. My debit card will bounce any payment that will take me over drawn, my credit card doesn’t care if I can’t pay it off next month and that’s what the banks hope you forget.
Correct. I use YNAB as a system to ensure that every dollar of spending on my credit cards are backed by liquid cash. I'm not going to argue the merits or downsides of something like YNAB; use whatever suits you.
But when that card statement balance comes due every month, it should make no difference because the cash was already deducted from my books when I made the charge.
This is what I do as well. Monthly bills are all direct debit, but almost all other spending goes on my credit card, and, without exception, I paying it off completely at the end of the month. I've done this for decades, and never paid a penny in interest - the key is to not spend money you don't have.
I get some small amount of Amazon vouchers every month for doing this (£10/m or something like that), but really I do this for the fraud and chargeback protection.
I feel like this works well for us, but you have to be able to budget - if you're not capable of budgeting or find credit too alluring, then you're better off using a debit card.
Glad it works for you, we are very good at budgeting but i find u less you put 100% of the “cash” like spending on the credit card it falls apart as you can double spend without realising and when we tried it for a few months I hated paying for August’s groceries in mid October - it just felt weird to me, far easier just to have a set XX amount in a current account each month and spend it down to 0 through the month on the cash transactions etc.
You miss out so much paying debit for things in the US. Most transactions net me 2-3% discount, I get baked in additional travel insurance on all travel I book with it, extra warranty on everything I buy, charge backs are easy when things go wrong, and if there's fraud I'm not out cash while things get investigated.
A friend did all her banking in a single checking account. Her card was duplicated and completely wiped out. She filed with the bank for fraud charges. It took almost a week before most charges were wiped out. All the while she had literally no money to eat, buy gas, etc. If that was a credit card, it wouldn't matter. She would still have all her money. She could easily just use a different line of credit, use cash, or use her debit card.
So paying a debit card gets you far less benefits and depending on viewpoint carries higher risks. But the benefit is you (sometimes) can't spend cash you do not have.
Australian here. Don’t use credit card, setup a separate account for bills, direct debit everything from there, don’t keep anything big on your debit card and use it with Apple Pay everywhere. No fraud, no fees, no complex things and rules to remember.
Also Australian here. Use a credit card which is set to direct debit (auto pay) the full outstanding balance from a high interest savings account. Credit card is added to and only used through Google Pay.
* Never pay anything in the way of fees or interest, including international fees.
* Never have a positive balance sitting in a transaction account earning zero interest (or as Americans would say, checking account).
* Never worry about overdrawing my transaction account.
* Card authorisations don't deprive me of my own money (eg hotel security bond).
* Importantly, in the event of fraudulent use of the card, the bank wears the damage while an investigation is underway.
A debit card might tick the first item on this list, but not the rest.
Amex pays me over a thousand dollars a year to use my credit card (which it takes from the merchants as fees.) I kinda feel bad about that, but I know those fees are built into the price and if I used cash or debit I’d still be paying the same price, just not get the reward.
But if they accepted lightning payments, I would pay them in BTC.
I used to ask "can you give me a discount if I pay in cash?" and most of the times the merchant would say no. Then I stopped asking and started using only credit cards for at least earning some "rewards" back.
("rewards" purposely in quotes since it's not really a reward, but amex/visa/mastercard want us to think it is - there's no free lunch)
They advertise it as 'paid by merchant fees' but somewhere in a ledge or spreadsheet everyone makes a profit except the individual consumer. Maybe the prices are higher in general, maybe there are some consumers where more value is extracted than from others, but money doesn't appear out of thin air (except when you get into the whole derivatives gamble). Someone, somewhere, gets screwed over when a bank or credit company "gives" you money.
Why would you ever not want to put something on a cc? It's quite literally free money (rewards/points + you can delay payments for a month and pay no interest)
Australian here -
Points systems are only really worth it in Aus if you're collecting frequent flyer related ones. There are not as many cash-back rewards as the US. We have had a universal fee free bill payment system called Bpay for 20+ years, and paying via cc usually incurs a minor fee. So most households will direct Bpay household bills rather than via credit card.
I don't fly much, so I dont feel the need to harvest points. I dont want my purchasing data picked up by any more companies than necessary (my bank & the vendor), and all the various chargeback and refund facilities offered by credit card companies are a bit less critical as Australia already has stronger consumer protection law around goods fit for purpose & refunds. Credit scores are not really a thing in Australia either, you are assessed on your current ability to service a loan rather your history. Defaults still show up & count against you, but 'building good credit' is again an American concept.
Credit cards are a product designed largely for the American market.
Australia put a cap on interchange fees in 2017 that caused a drop in card rewards. Merchants argued that the lower interchange costs would be passed on to consumers. However, it appears to only significantly affected the consumer rewards.
I can't speak for Australia specifically, but most EU countries sharply cap the interchange fees that credit card companies can charge so they don't really have rewards to speak of
In Poland I get rewards for using debit cards too, credit cards do not offer anything more in that regard. The rewards offered by bank are the same regardless of which type of card I use. They are in fact based on referral programs (bank gets a small percentage of a transaction if we use their link and they share that earning with us).
Debit cards are free and the cheapest CC I can get from my bank is $10/year. And every month I would need to make sure that the CC is paid. There's nothing CC can offer me besides maybe building a credit score.
Classic mistake, using credit or specifically a credit card does not always mean you dont have the money.
> If you do have money, why do you need to borrow money you already have?
Do you have a mortgage? Do you also have any money in a bank account / savings / cash in your wallet? If so "why do you need to borrow money you already have"?
Indeed the mortgage example is even worse, because typically a morgage has interest paid whereas a credit card paid off within the month does not.
There is no free money, and delaying is essentially spending money you don't actually have. If you want to buy something that comes out of your short-term savings account here. Or you can choose to not do that and have all your money in one single account and everything you do goes in and out of that. And you can configure it in a way that disables going negative so you don't get this weird overdraft fee system unless you choose to.
Same here in Western EU. And if you can't or won't use Apple Pay, any NFC EMV or Pin + Chip EMV will do. Don't combine automation with manual transactions (the direct debit thing), don't put a bunch of value on a thing if you don't have to (both the direct debit thing and the cards) and don't use a credit card or 'overdraft' (or whatever the local equivalent is) features.
> With a debit card you’re relying on the bank’s good will. With a credit card it’s the law.
Can't emphasize this enough!
It is true that many banks do offer fraud protections on their debit cards. But those are just a choice by the bank. They can at any moment stop or withdraw those protections and then you're out of luck.
With a credit card, the protections are written into regulation, so every bank must follow them and can't change the terms.
It's almost as if the law is setup to let people make bad choices with money they don't actually have so that some value can be extracted from them later.
Like it or not protecting people costs money, with credit cards banks have an opportunity to potentially recoup that, otherwise they don't do that at all or only do it when they can afford it.
Really the primary disadvantage these days is that you won't be able to access that part of your bank balance (often lower than most credit limits) for a bit of time until the bank either issues you a temporary credit or the dispute is resolved. This happened to me once in the earlier half of the 2010s and it was frustrating to have to wait for my balance to get restored.
There are enough banks in the US nowadays that cover debit fraud that any bank that doesn't do it will really stick out like a sore thumb and eventually lose their customers.
Even if things are taken care of in the end, with debit fraud the money leaves your bank account immediately and then it is up to you to make sure you get it back.
With credit card fraud it won't get to the point -- you dispute the charges before paying them back.
Exactly. $10k skimmed out of my bank account is a huge problem for me while it gets resolved. $10k skimmed off a credit card, eh, I'm never that close to my limits anyway
One of the biggest wins from credit cards (imo, of course) is reward programs. Getting a 1-3% discount on purchases is pretty nice (plus, obviously, fraud protection, etc.). However, some issuers are using crypto to claw back at this perk; for example, the Coinbase debit card can give you 4% back.
I find it hilarious that Americans will tell you about the great discount/cashback they get, then in the next post crypto advocates will tell you that crypto currency can avoid the insane credit card fees.
It's almost like the two things are related, but few people seem to link them...
In Europe and Australia, caps have largely fixed the latter, at the expense of the former. Seems better all around.
Insane credit card fees? What? Most cards do not have a fee.
And for those that do, it’s very easy to recoup much more than the fee in rewards. For example, Chase Sapphire is one of (or actually the) the most expensive cards at $550/year. But even then it’s very easy to recoup much more in rewards.
They’re talking about interchange fees you pay on every transaction. Which is where the money to fund rewards comes from.
In the US you’ll be paying something like 1% on interchanges fees for every transaction, in the EU it’s something like 0.05%. Orders of magnitude less, thus orders of magnitude less rewards, and also fraud, because banks can’t use the interchange to write off fraud and thus implement proper controls.
Unless the merchant is offering discounts for cash payment, it's the customers who are not using credit cards that are paying/subsidizing the fees. Sadly, not using a credit card is just throwing money away in North America
In reality it’s people with poor or non-existent credit that pay. They can’t access cards that offer rewards, so they end up eating the costs. It’s a remarkably good way of transferring wealth from the poor (who are usually deemed not worthy of credit) to the rich (who are worthy of credit). Pile on the other costs like fees for using cheques rather than direct deposit (also common for poor people who aren’t salaried), crazy overdraft fees etc, and becomes pretty clear that the US banking system is paid for by the poorest in society, and only benefits the richest.
The Coinbase card ties up your assets (you have to hold USD or crypto on their platform). Whereas the credit card is an interest free loan for the statement period. I'd take the latter any day of the week.
Absolutely, but there are so many people in the USA that are excluded from the ability to obtain a credit card - even a secured one - that debit cards are a god send to us.
Both Cash App and Venmo sent me debit cards without requiring any ID.
With or without a credit card it's still spending what you don't have. The credit card just makes it easier to ignore the fact that you're in dire financial straights.
For maximum FICO score you ideally want every card except one to report a $0 balance and one card to report a $1 balance (some issuers will forgive a balance of $1 so you might have to use $2). You do this by paying down the cards before the statement generates. Once the statement for the $1/$2 card generates you can then pay it off.There is no need to revolve a balance. In fact if you pull your credit reports it does not even show if you are revolving a balance. If you would like to see what data is in a credit report you can obtain a copy for free.
If you are interested in how FICO scoring works there is a lot of information available on various forums. The best resource I have found is on https://creditboards.com/. The FICO algorithm is proprietary and they do not disclose it, but through experimentation people have managed to reverse engineer quite a bit of it.
It's a little complicated. My credit score has been consistently higher than my wife's score, and but she has never carried a credit card balance in her life. You get high credit score marks for making banks money, but not borrowing so much that they get nervous.
It's more than payment history. I avoided credit until I bought a car, and I made a point to pay my car loan off early. Seemed like a way to demonstrate that I was responsible with my money.
The month I paid off that loan, my credit score dropped precipitously.
In 2006, my wife and I bought a home, and had to get two separate loans to make it work, because our credit scores weren't great at age 26, since I generally avoided credit.
As soon as we opened those two loans, our credit scores jumped to the highest they've ever been.
That and other patterns I've watched over two decades are why I believe credit scores are entirely about how well you pay the banks' game.
You made my point — they care about payment history, not paid off. You’d be better served taking a $500 personal loan from a credit union and paying the payments every month.
Using a very, very low, or no percentage of your available credit for ages makes you just as bad of an investment for these companies as customers who run off on the bill.
In both cases, higher risk of default, less chance of profiting from interest, lower creditworthiness score!
I have never once carried a credit card balance or paid a cent in interest. My credit score is over 800 which is pretty much maxed out. The only things on my credit history are a few credit cards that I got to establish credit history, and my mortgage, which is why I needed a credit history.
So I got 3 credit cards and used them each during each month so that I would established on-time payments on all three and boom, I had perfect credit after a couple years and qualified for a mortgage. I didn't use any credit before I decided to buy a house in my 30s so I had a completely empty credit history prior to that, apart from a library that reported a lost book. So it just took a little while to get my average account age up and my number of on-time payments above some threshold.
Now if you don't use the card at all, it is less effective at establishing credit because you don't get the on-time payment history or balance. The credit bureaus just get reports of on-time or late payments, balances, and delinquencies/defaults, etc.
You will be given the best rating at a small non-zero percentage of your total available credit being used each month, but it doesn't have to be carried.
All you have to do is make sure you don't pay it off too early. Just wait until the due date, and pay off the statement balance, not the full balance. If you pay it off mid-month, before the end of the statement, or paid the full balance instead of what is due, you may get a zero balance reported which is a slight temporary hit to your score, but not that significant. I found that it was best to have a few cards with a total available credit at least 5 times my monthly spending. That way the reported balance ends up being <20% of my total available credit which is near the sweet spot. If I am going to do a refi on my house i might try to micromanage it to somewhere close to 5% for a few months ahead of time and get a few points added to my score, but once you get your score up around 800 it doesn't really matter if it is up or down 10pts or so. I found that as my average account age increased, the swings from slight differences in balance were smaller.
Pretty much all of that is handled by the social safety that the government is there for or by your own savings that you build up because you are an adult and look ahead to make sure you can deal with such events. One of those things is planning and specifically financial planning.
A full quarter of adults in the US have no savings at all. It can be hard to build up your reserves when more than half the money you make from your two jobs goes to rent. Did I mention those jobs are both "part time" so no benefits either.
To be fair, debit card offers a few advantages over credit card:
* Debit card allows to set granular spending limit (e.g. $100 per day). So you can protect the potential amount that a fraudster can spend with your card.
* You can set it up to send transaction details via email on every purchase. This is a lot more convenient than, say, checking the credit card statement at the end of every month.
I actually prefer using debit cards for daily expenses. For me, credit card is almost exclusively for online purchases.
What? That seems totally backwards. Don't spend money you don't have, which mean using debit. Credit is useful for the single use case of buying a house.
Why spend your own money when someone is willing to loan you money for free, will give you some of your money back, and will also protect you against consumer issues?
You’re leaving money and protection on the table by not using them.
You have to pay it back… one month later. You can keep your own money safe and invested until then. And you don’t have to pay any more if you pay it on time.
The bank wants you to use credit because they get paid by the merchant every time you do.
Not the original poster, but I don't want to spend my limited time on earth trying to minimize the money I'm leaving on the table -- thinking about credit cards, points, money systems and wheeling and dealing in order to eke out a little extra scratch is thinking I would personally rather put toward nearly anything else.
That's why I would rather spend my own money when someone is willing to lend it to me for free.
Well up to you but that’s irrational - it’s leaving money on the table and what’s more you’re actually paying for my free loan and my cash back and my protection and my free flights and not getting anything yourself, as I’m paying the same price for products as you.
It's not irrational, there's a whole bunch of other things you're not considering. For example, a debt creates a financial obligation and as such it diminishes one's personal autonomy. People who value their personal autonomy will take that into consideration before going into debt.
You're shipping a ton of personal baggage under "personal autonomy".
Why even take part in economic transactions at that point. If your definition of autonomy is that extreme, the concept that someone might have something you want but don't have must be a alien concept
My definition of personal autonomy is extreme? What definition? Why do you think it's irrational to assess how getting into debt affects my personal autonomy?
> Credit is useful for the single use case of buying a house.
I haven't paid a cent in interest on a credit card since I was in my early 20s. Thanks to credit card points/miles, I've flown all over the world (often in business class), enjoyed stays at hotels, had access to airport lounge access, received various upgrades on hotel accommodations, car rentals, etc. -- all for next to nothing.
Credit cards are an excellent tool if you are willing and able to use them properly.
> What? That seems totally backwards. Don't spend money you don't have, which mean using debit. Credit is useful for the single use case of buying a house.
Using credit in this sense means using a credit card, not necessarily running up a debt in anything other than a nominal sense. Using a credit card and paying off your balance in full every month (so that no fees are assessed) is way better for later loanworthiness and similar credit-based evaluations than using a debit card.
> Credit is useful for the single use case of buying a house.
If you can exercise self-control with spending, you can use a credit card for almost everything. I think Dave Ramsey advises you're less likely to spend money if you use real cash, but for some people, this is not an issue at all.
I've always noticed that cash has a way of disappearing from my wallet with me wondering "what did I spend it on?" With a credit card I have to think: will I punch myself in the face when I see that on my statement?
I took a loan on a new car. It is 0.9% APR. It's easy to have your money grow faster than that, so leaving my wealth invested and paying the payment nets me more money in the end than if I paid it up front. I could take money out of my investments to pay off the car tomorrow, but with the markets being as they are that would be insane. Even the bonds I own have higher returns than 0.9%.
Besides the gig economy I heard that a lot of retail businesses like Walmart now pay employees by debit card instead of check. So instead of a check cashing place taking 3% of people's paychecks some bank is taking 1.x% in interchange, and if the bank happens to be owned by Walmart well who would notice.
if you are not living paycheck to paycheck, you can keep the minimum balance in a checking account and then arrange have your paycheck automatically deposited every payday with Direct Deposit. This is free.
Check cashing places give you cash for paper checks. They charge a fee for the service.
Just to clarify, many banks have no minimum balance and charge no fee to cash any check. However some may have a harder time opening accounts than others.
I'd like to think that when we build a society and designate people to run governing functions, this would be one of the jobs we would like them to carry. At least, that's how it works here. Make sure that people are enabled to be members of society.
Back in 2005 or so, I recall my American colleagues also saying they were paid every 2 weeks, instead of monthly. That seemed pretty strange to me, for salaried positions.
It varies by employer, to this day. ADP (biggest HR company in the world, likely) probably still pays its employees every two weeks, but I no longer work there. My current company is on the twice-a-month schedule. I've been paid monthly in past jobs. And my wife is currently getting paid once a quarter!
Only if you want cash immediately. In this case, the fee is basically insurance against the check bouncing. It's free if you instead deposit the check and wait a day or two for it to clear before withdrawing the cash, since in that case they can just take the money back out of your account and not suffer any loss if you gave them a fraudulent check.
> the industry generally estimates approximately $350 a year in costs to maintain a checking account, of which approximately $120 is direct marginal cost
Does this not seem ridiculously high to anyone else?
This seems most likely to be an error in the document: "median checking account balances at account creation are only around $3,000 ... At a 4% net interest margin, this account would only contribute about $120 in margin during its first year...." 4% of $3,000 is $12. I suspect both $350 and $120 are 10x too big. Alternatively the average checking account is 10x the median which seems unlikely.
The credit to debit card ratio is something the Australian banking regulator looks at too. The charge fees in EFT/POS have become a significant issue when there is a floor fee for small transactions. During covid, cash handling nosedived and paywave exploded. Now, many coffee shops and traders who used to do cash are stuck with a market acceptable price for coffee, but bank charges on card processing which eats their margins in fees they can't easily pass on. Other traders have gone back to $10 minimum for card type rules.
> The government’s current target is 40% of the payments mix, about double the current amount, which would put it on parity with the present state of play in the U.S. (and behind Asian peer nations, at around 50%)
It’s shocking that still about 50% is cash based.(if I am reading that right)
In Vietnam, even the 'credit cards' are 'debt cards'. There is no concept of a credit score there (or a legal way to really make people pay up a debt), so they came up with this work around. To get a credit card, you have to carry the total amount of 'credit' as a time deposit in your account that you can't touch.
It's not entirely true. Some banks only issue credit cards if you receive salary via their bank account or have a deposit there (mostly state owned banks) but other have no such requirement. Also they already have a credit score database up and running (CIC).
Debit cards prey on poor people, who have been memed into thinking credit cards are dangerous.
There is no good reason to use debit over credit in the US if you have the option, but I constantly see advice from people who should know better arguing in favor of debit.
If someone steals your credit card and makes fraudulent purchases, your rent and heat and electricity bill checks aren't going to bounce while the bank is resolving the issue.
I guess everything in the US is controlled by fear. So for them this might be a legit argument. "What happens if someone breaks into your house?". "What happens when somebody robbed you?". "What happens when somebody uses your credit card to do fraudulent transactions?"
Guess what, having a debit card in the Netherlands gives you protection against all of the above. Luckily not many people are ruled by scare tactics over here.
Lost your debit card for some reason? Just a simple click in your online banking app on your phone is enough to block the current one and recieve a new card the day after.
> Lost your debit card for some reason? Just a simple click in your online banking app on your phone is enough to block the current one and recieve a new card the day after.
This is how it works in the US as well. What you haven't addressed is how you get money back in your debit account if someone manages to steal it. For that period of time, you are out the money until the bank resolves it. By definition, this is not true of a credit card.
That sounds pretty similar to my relationship with my bank. They will refund immediately while they investigate. I doubt it is regulated by the gov't, though, I think it's just because it's a bank that markets themselves as having superior customer service.
You go to the bar Friday night. Bar tender steals your cards info and starts making fraudulent charges. You wake up Saturday with zero money. End of working day refund means you have no money until end of day Monday.
In the United States, paying with credit cards often rewards you with 1%-5% of the value you spent, among other things. It adds up to a lot over time, so everyone in the US should always being using credit cards whenever possible to secure those rewards.
Again, I'm speaking from a purely US perspective, but there is no good reason to use a debit card instead of a credit card, for the same purchasing patterns. You have better fraud protections, you don't worry about overdrafts or transaction reordering, you get a month interest-free loan if you pay back your balance every month. You get cash back or reward points or etc. And if some emergency comes up, you have credit you can call on if you need it.
The argument for debit is basically "I cannot control my spending without a hard limit". Everything about debit is the same as credit cards or worse.
I think the argument you mentioned is actually worth it for some people.
Credit card interest rates are really high and people are better off getting charged a one time overdraft fee rather than buying stuff they cant afford and get saddled with high interest credit card debt.
Ha, it's true, the limit enforced by a debit card is handy. I love my wife dearly, but her spending habit is 'if it is in the account, I can spend it.' So after trying various strategies, we just settled on keeping a debit account specifically for routine household purchases, groceries, etc. It is budgeted exactly what we plan for, not a dollar more, and she knows that when it's gone it's gone. That's not strictly true, of course, we replenish if we buy a lot of groceries in a month, but it serves as a useful signal for her that she's spending more than the generous amount we budgeted for this purpose.
This is fantastic. It’s long been difficult for me to understand the prevalence of instant payout mechanics, or the propensity of ordinary people to use debit cards like credit cards. I’m that guy who only uses his debit card to withdraw cash, puts everything on high reward credit cards, but never carries a balance.
Bankers are product managers for financial products. They implement features to acquire, activate, retain, and refer customers to ultimately drive revenue and margin. Debit cards are a first class product and overdraft fees are nothing more than a feature.
I'd be interested to know patio11's updated take on the long arc of crypto.
As a crypto person, it's cool to see how the benefits he describes-- eg lower transaction costs, embedded finance, and novel items such as bundling reporting and instant settlement-- are also driving much of the product-side interest in crypto and web3.
Lower transaction fees? I moved a few hundred £ into my wallet the other day for some Ethereum and paid like £50 in various fees and gas. The crypto world is full of layers of middle men taking their slice. Even swapping some ENS to ETH cost over $100 in gas
You're right that ethereum's fees are extremely high, and they will only get much higher. That's because, heading into the future, ethereum isn't intended for direct use by end-users.
End-users may expect to use ethereum's live & emerging scaling solutions, also known as Layer-2 networks or L2s.
The ethereum chain itself has become known as the "base layer" or, more commonly, "the L1". Only rollups, governments, megacorps, and extremely rich people will be able to afford transacting directly on the L1.
The good news is that L2s are becoming great for end-users. Some are live now (optimistic rollups), and the most promising of them will be live soon (zk/validity rollups).
For example, Arbitrum and Optimism are optimistic rollups L2s and have achieved a significant linear decrease in transaction fees.
As another example, zkSync 2.0 and StarkNet are zero-knowledge rollup L2s, also called validity rollups, that achieve a greater linear decrease in end-user cost than optimistic rollups, and unlock a (truly) exponential decrease in end-user fees by using a spectrum of off-chain data solutions. This fantastic result of exponential decrease in cost for end-users is achieved by way of an important new-ish branch of mathematics called "zero knowledge proofs".
Currently, zkSync 2.0 and StarkNet are the "Luke Skywalkers" of ethereum scaling. We are expecting great things from them, and need them to deliver to allow hundreds of millions of users to onboard to ethereum next year.
You're most welcome! I'd be happy to discuss this with anybody interested. The best way to reach me is via twitter DM https://twitter.com/ryanberckmans
There are thousands of cryptocurrencies in use today. If you're out after faster transactions with lower fess, Algorand seems like a good option. Fee seems to be about 0.001 ALGO (0.002044 USD) about finalizes in about 5 seconds.
Please note that the article points out that it cost tens of millions of dollars to launch a new bank and takes years of work. Overregulation is the reason we can't have nice things.
The bank cartels probably won't last long, just wait until money becomes mostly decentralized and digitalized. We'll finally be able to use our money without limits or immoral intermediaries.
Have you tried sending $10,000 or more between two "high risk" countries, like from Nigeria to Ecuador? There are so many limits for most people using banking today, where your money gets stuck in multiple places before you "verify" this and that, and then transfers take multiple days if they even get approved in the end.
Bankrupt governments also control what money you can receive.
Example is Lebanon where if you send someone US Dollars, they’ll receive it in the local currency which is under hyperinflation.
The central bank governor (government too) there is pure evil and is a US political pawn. I know it sounds outlandish, but if you look into it, you almost wont believe its real.
> An interesting wrinkle about net interest is that most customers don’t contribute much. In much of the U.S., median checking account balances at account creation are only around $3,000
Thats a lot of money not in crypto or stocks. Surprising.
Ah, sorry, so less about what people should do and more about what you think people would be doing (or I suppose about what people have the resources for?). Gotcha
If you’re using a credit card for most purchases, you still likely pay the bill with a checking account. You might also have to pay rent/mortgage from this account, so keeping a ~$3,000 buffer seems pretty healthy. (Let’s assume $1,500 for rent/mortgage[1], $1,500 for other monthly expenses, emergencies, plus any other buffer the account holder is comfortable with.)
1. Average rent seems to be around $1,100, and median mortgage payment is about $1,600 based on a quick search.
It really depends where on the income and wealth ladder you are. Lower and middle income, cash is king. Upper income, you’re as invested as possible and you’re able to pay for expenses with a combination of credit/margin, investment income, and comp (salary and equity liquidation). You’re keeping as little cash on hand as possible because “cash is trash” and doesn’t keep up with inflation such that assets do.
You still need a buffer to pay for expenses...$3000 to someone with Upper Income is not a lot. I don't think anyone is liquidating assets to pay for their electric bill.
Expenses can be paid from margin and credit, and that paid back when the income lands in the brokerage or cash management account. Credit cards are usually ~20 days float, margin is 1-2% for as long as you’re extended with it (ignore margin rack rate on brokerage sites, high net worth folks aren’t paying that).
Higher level, being poor is expensive and it gets cheaper and easier to get ahead as you get ahead.
Credit cards are at least 20 days - you also have on average 1/2 a month before the monthly statement, and then another 20 days until the statement is due.
Shouldn't that be the opposite? The less money you have, the more effort you should put to using it efficiently. Once you have enough money, it's worth keeping a tiny fraction of it as cash for convenience, because investing it won't change anything.
there's a reason why most finance advice lists "3-6 months expenses in cash" as priority one. being forced to sell assets during a market downturn hurts you a lot more than parking a couple extra thousand in an index fund helps you. when you're barely making ends meet, the smart move is minimizing variance. when you can comfortably cover your expenses, you prefer to accept more variance to maximize EV.
It has to do with how long you expect a given dollar to live.
Below a certain point a dollar doesn't persist very long since you're mostly living paycheck to paycheck. If you're spending most of what you earn, then what matters is that you can pay for all the essentials. It doesn't really matter what the price is in absolute terms if your paycheck keeps pace.
(It would be really weird to cash your paycheck, buy some ETFs with it, then sell them all back a week later to pay rent and buy groceries. You'd just get back what you put in.)
Higher up a given dollar lasts a lot longer. Even the dollars in a retirement fund will last for decades - imagine if you were wealthy enough that 95% of your assets were like that. At that point you have two choices:
- Either keep it under a mattress, and lose a few percent of most of your money each year
- Or put it somewhere more active, where you have enough growth to keep pace
I suppose you could liquid some of your return generating assets every month right before you pay off your cc. However since 3k is a neglible amount of money to most people here, I wouldn't really worry about not having earning yield on your 3k. Also it's often useful to have some literal cash in your bank account.
At least in my country, inflation is higher than what I get in interest. I lose money every month. I prefer to, over the long term, earn more than inflation. The only way to do that it to add risk. Over the long term, the risk reduces and I’m net positive.
Index funds reduce the need to know about stocks. I buy the economy, not a stock.
(Well mostly. That’s the idea.) There are times I hold more cash but then I feel the drain on my return every month.
In any case, $3k cash seems like a small amount for the safety it brings. Emergency funds are crucial.
> Index funds reduce the need to know about stocks.
And for that vast majority of people, whether they are expert or not, the index fund will outperform their personal stock picks anyway.
99% of the population only needs to know 'put it all in a vanguard S&P 500 fund' as their long-term investment advice, at least until they're old enough to see retirement on the horizon.
I was once in a meeting with one of the senior executives at JPMorgan, where the guy smugly told me he felt they were “doing a service for the community” by charging people overdraft fees. After leaving the meeting, my very senior colleague said, “I had to hold myself back from throwing that guy out of his window.”
These sorts of articles — half PR, half history lesson — tend to leave out these sorts of politically inconvenient but important bits of history. It’s so much work to unpack the bias...