Six dark secrets banks don't tell you

by Serena Cowdy on 25 August 2010  |  15 comments
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We reveal six ways your bank might try to pull the wool over your eyes.

When it comes to playing banks at their own game, you need to have your ears pricked and your eyes peeled. Financial providers are there to make a profit, so we can’t expect them to act purely for the good of our health.

When it comes to transparency and ethics, some banks certainly don’t shower themselves in glory. I’m going to highlight six sneaky tricks that banks try to get away with - so they don’t slip by you unnoticed.

1. Plummeting savings rates

A recent investigation by The Daily Mail found that some of the biggest banking names on the high street routinely fail to tell savers when their rates are being dropped.

For example, many of the top-paying savings accounts have bonus rates which end after 12 months, leaving the customer with a measly rate of interest.

Currently, your bank isn’t obliged to keep you informed as and when this happens. After all, we should all have read the terms and conditions when we signed up.

But wouldn’t it be nice if you got a letter or email telling you exactly where you stand? In the meantime, keep a close eye on the interest attached to any variable rate account. Use this table to check up on any old accounts:

2. Negative payment hierarchy

Most credit cards operate a negative order of payment. Essentially, that means the cheapest debt on the card (that charging the lowest rate of interest) is cleared first - and the most expensive debt is cleared last. Of course, this works in the provider’s favour, and boosts its profits nicely.

Unfortunately, it’s often difficult to find out whether a credit card operates in this way before you apply: The order of payment is usually buried deep in the terms and conditions, between pages and pages of small print.

So, skim-reading financial terms and conditions just isn’t good enough, and could land you with some very nasty surprises.

There are a few credit cards that operate a positive order of payment (clearing your most expensive debts first). Saga, Nationwide and Co-op credit cards all work like this, so it’s worth tracking them down and seeing whether they meet your needs.

Also, be aware that the rules are changing in January.

3. Available credit

You’re at a certain disadvantage when making a credit card application - because providers keep crucial information to themselves until the very last stage of the process.

Notably, you’re usually not told what your credit limit will be until your application is complete, accepted and processed.

For example, if you need a limit of £3,000, but you’re only offered £1,000, you may regret making the application in the first place. However, it will be too late to back out, in the sense that the application will already be on your credit record.

Surely there’s a way providers could provide this information at an earlier stage in the process, to avoid people taking out cards that don’t meet their needs?

4. Hidden arrangement fees

My bank tried to hit me with this sneaky rip-off last year. I’d had a £1400 overdraft limit for the last year. Then one day, I got a letter from my bank, saying it was delighted to be able to arrange a £1400 overdraft limit for the next 12 months (in other words, not ‘arranging’ anything new at all!).

Further on - right at the end of the fourth page to be precise - I found a single sentence saying they’d be charging me a £25 fee for this ‘privilege’.

When I visited my local branch and challenged them, the charge was dropped ‘as a gesture of goodwill’. It’s another example of banks trying to slip fees in under the radar… and another reason to read all the way to the end of the paperwork!

The good news is, there are currently 5 ways to get an overdraft for free – so you don’t have to put up and shut up.

5. Interest on monthly instalments

If you buy home insurance from your bank, you’ll probably be asked whether you’d like to pay all at once, or in monthly installments.

Monthly payments sounds great in theory, because it means you don’t have to find a large chunk of cash all at once. However, steer clear if at all possible: Pay like this and you’ll usually be charged a hefty rate of interest for the privilege.

Recent question on this topic

• toyraman asks:

  why does my home insurance renewal quote increasing every year, even though no claims?

  • 
    LoveKat answered "There are probably a myriad of reasons for this happening... For example, quite a few people don't..."
  • 
    Paul Warburton answered "Lovekat is spot on, the insurance industry moves through soft and hard markets and these markets..."
  • Read more answers

Even worse, providers don’t always make this clear. When the monthly payment option was offered to me over the phone, the payment of interest wasn’t even mentioned. I was only told about the hefty rate whenI queried it directly. Grrr!

If you do need to pay monthly, you’re better off using a 0% on purchases card to pay upfront, then spreading your repayments by month on the card, interest-free.

6. When you’ve made a mistake

Everyone makes mistakes. A financial mistake can prove particularly disastrous, however, because banks often don’t tell you that you’re sinking further into a pickle.

For example, exceed your overdraft limit and you could face a hefty fine and an extortionate rate of interest. And of course, it’s not in the bank’s interest to tell you, because with every day that passes, they’re benefitting from your error.

This is one reason you should always check your balance and transactions on a regular basis. And you can manage your money quickly and easily using the lovemoney.com online banking service.

More: Watch out for this banking rip-off | Seven rip-offs that prey on your fears