There are certain life choices that you expect will impact you financially long term—taking out student loans, buying a car or house, having a child. But there are other payments that shouldn’t have to hit so hard, like buying groceries, paying your phone bill, or putting gas in your car. Events like these can catch you off guard and slowly send you—and your bank account—into a tailspin. The first step in setting yourself up for financial success is understanding how these seemingly inconsequential payments (and the fees that come with them) are setting you back.
First thing’s first: You have to understand disposable income. As its name would suggest, disposable income is funds you have at your disposal, or the money left over after taxes and other mandatory expenses come out of your gross pay. Disposable income has grown steadily in previous years—the average American spent $61,224 in 2018, according to the Bureau of Labor Statistics—but the average credit card debt grew right along with it. Meaning more people now have the means to spend, but only few know how to spend it. To make matters more complicated, economic downturns—such as the 2008 crash and COVID-19-related financial crisis—deal tremendous job loss and force many to turn to credit. As the second fastest growing debt in the country behind personal loans, credit card debt is a common stressor on American households. The 2015 Standard & Poor Global FinLit Survey indicated that 60% of U.S. adults had credit cards, but only 57% of them were financially literate, or they had a basic understanding of topics such as borrowing, investing, and saving money.
According to Debt.org, each credit-card-carrying household in the U.S. has on average $8,398 in credit card debt, a portion of which can be attributed to compound interest, which is the total extra money accumulated on an initial loan or account balance (think the snowball effect). Compound interest is determined by your credit card’s annual percentage rate, or APR. When you purchase something with a credit card and carry a balance from month to month, your total amount owed will include the initial payment plus whatever interest has accrued each month. So if you purchase gifts during the holiday season and carry a balance into the new year, the amount that you pay will now be a little bit higher than what you originally spent, and that number will only increase with each passing month.
APRs fluctuate depending on what type of card you choose, your credit score, and a number of other factors. In the first quarter of 2020, the average credit card APR was 16.61%, according to the Federal Reserve. This means that if your credit card carries a balance of $1,000 at 16.61% APR and you make the minimum payment of $25 each month, you can expect to pay the card off in just under five years, with more than $450 going to interest alone.
On the other hand, bank fees can pop up on your statement quite sporadically and might seem insignificant. These penalties—often appearing as overdraft, ATM, or monthly service fees—usually range from $2.50 to $36. But depending on how often you visit the ATM or withdraw more money than is currently in your account, bank fees add up and can take more of a financial toll than you might expect.
According to a 2012 study by the Consumer Financial Protection Bureau, more than 27% of consumer bank accounts had incurred overdraft or non-sufficient funds fees, also called NSF fees, adding up to an average of $225 per person per year. In 2010, it became mandatory for banks to require consent from account holders before charging overdraft fees. There are pros and cons to opting into these agreements. While it does provide instant access to funds—even if that money is not currently in your account—it can also be a financial burden for those who take advantage of overdraft too often.
If negative account balances are left unhandled, the bank may close your account entirely, which, among other hassles, can keep you from being able to open checking accounts at other institutions. The good news: There are programs in place to give account holders the benefit of the doubt, including fee caps, forgiveness periods, and linked account overdraft protection.
As interest and fees add up, it’s easy to feel overwhelmed. However, there are preventative measures you can take to ensure you’re staying on top of your finances and keeping unnecessary payments to a minimum:
These measures might seem minute, but they can make a world of difference. Credit card debt is a daunting topic—bank fees likely less so; however, by keeping this key advice in mind, you’ll save yourself the time and effort of fighting to get your money back in the future.
Cushion helps you waste less money, save more, and live a financially healthier life. We monitor your bank and credit card accounts 24/7, find and alert you about pesky fees, let you know which fees are negotiable, which banks are cooperative, and can even automatically negotiate on your behalf.* To date, Cushion has secured customers more than $11 million in bank and credit card fee refunds—and we’re just getting started.
*Cushion only negotiates fees with high refund odds. We cannot guarantee any negotiations, a regular frequency of negotiations, or fee refunds—your bank makes the final call.