I’m a huge fan of credit cards and I’ve never been in credit card debt before. I’ve been fortunate enough to learn the dangers of easy credit and was never seduced by its siren song, or her underhanded tactics like double cycle billing. The latest saga involving credit cards is debate in Washington over the proposed consumer protection rules offered by the Federal Reserve Board under an update to Regulation AA (Federal Trade Commission Act) — Unfair or Deceptive Acts or Practices.

Would you like to contribute? Here’s the press release discussing the proposals, simply scroll down to Proposals for Comment and click on Submit comment underneath Regulation AA.

My thoughts:

Freezing Interest Rates

One of the proposals is prohibiting banks from increase rates on pre-existing credit card balances. At first glance, this makes total sense. When you sign on the dotted line for a mortgage, you are aware of how the interest rate will behave. On a 30-year fixed mortgage, it will never change. On a 5/1 adjustable rate mortgage, it will be set for five years, then change every year after that. While in the last few years this was abused, in principle is makes total sense. You know what you’re getting into. With credit cards, the rate is always variable and can always change. However, you accept that when you apply for and begin using the card.

That being said, I do think that credit cards should be adjusted to reflect the way it’s actually being used and that requires that rates be locked at the time it is being spent. The consequence of this is that all interest rates will rise because it reflects a greater risk assumed by the credit card company and credit cards will be harder to get. You provide no proof of income when you apply for a credit card, perhaps that will change.

Application of Payments

Consumers taking advantage of 0% for life offers recognize this little line item, credit card companies apply payments to the lowest interest rate first. For example, recent 0% for life offers usually require two or three purchases a billing cycle. The cost of those purchases is at the prevailing rate, usually much much higher, and payments are applied to the 0% offer.

Consumers should be allowed to pay down whatever balance they want, not be forced to pay the lower offer. In all cases, this will be the amounts with the highest interest rate. Don’t listen to Dave Ramsey, you want to pay the higher interest rates first, not the ones with the smallest balances.

Double Cycle Billing

This is tactic is just underhanded. If you’re an impartial observer, you can understand variable interest rates because credit card companies put it plainly in their agreements. Double cycle billing? Give me a break. Double cycle billing is when they take the average of your two previous bills and charge interest on that. I don’t even know why this was even acceptable in the first place.

Summary

Obviously, the banks don’t like it:

“We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards,” President and CEO Edward Yingling [of the American Bankers Association] said in a statement.

I don’t agree that they go to far, I think they’re great proposals, but I do agree that it will result in less competition, higher prices, fewer choices, and reduced access but that’s exactly what we need. We don’t need credit card offers piling up in our mailboxes, we don’t need the average family credit debt to be around $10k, and we honestly will survive if there are fewer credit card companies.

Weigh in on proposed credit card laws [CNN Money]

(Photo: thetruthabout)

Do you ever read the news or watch television and wonder what those speakers mean when they say “the market predicts the Fed will [increase rates/cut rates/do nothing]?” I have.

What they are referring to is the federal funds futures market where traders buy and sell options contracts linked to the federal funds rate. Unlike other options, where an actual asset could be delivered (an oil futures contract is actually a contract to buy or sell oil at a future date), the federal funds futures contract is a little different. Rather than butcher the definition, according to the Federal Reserve Bank of Cleveland:

A fed funds futures contract is an interest rate futures; i.e. a futures contract whose value is based on a fixed-income security or interest rate. The underlying interest rate for the fed funds futures contract is the average daily effective federal funds rate for the delivery month. The final settlement price for a contract is 100 minus this average rate.

When the market “predicts” the next Fed action, it’s really what the wisdom of the masses (the fed futures trading masses) believe, based on their trading actions, what the future federal funds rate will be in the delivery month of the option.

Where can you find this information easily? The Federal Reserve Bank of Cleveland’s Fed Funds Rate Predictions page! It’s updated daily and has tons of information (check out the excel spreadsheet you can download).

How can you use this? Outside of fun trivia, one way to take advantage of this is to avoid buying long term CDs if the prediction says the rates will go up and to buy CDs when the rates are going down. While the predictive ability spans only a few meetings in the future, it can give you a better idea if you’re deciding what to do. Of course, since everything is measured in probabilities, anything can happen.

(Photo by NCRC)

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This week is the third anniversary of the Carnival of Personal Finance at Consumerism Commentary, its daddy.

If you think interest rates are falling, put some of your savings into a CD. Since last August (2007), the Federal Reserve, haunted by the spectre of a slowing economy, had been hacking and slashing the Federal Funds and Discount rates. During that run, and until just recently, the prevailing attitude on Wall Street was that the Fed was going to continue cutting the rate until the threat of future inflation balanced out the threat of a recession. With this last twenty five basis point cut at the end of April, the prevailing attitude changed. Analysts now believe the Fed will stand pat and potentially even raise rates in the future.

During those rate cuts, all of the high interest online banks dropped their savings account interest rates dramatically. Since January of this year, the interest rate on E*Trade’s online savings account fell from 4.95% to 3.01% (only to increase, just recently, to 3.15%). ING Direct account holders saw their rates fall from 4.10% to their current rate of 3.00%. If you were able to purchase a CD at the prevailing higher yield online savings account rates for even a year, you’d be sitting pretty on those funds right now and that’s why CDs become popular during a falling interest rate environment.

This is where you say: “Jim, I’m not an idiot, I know that if the rates are going lower then I want to lock in good rates.” Yes, you are not an idiot but the point is I didn’t lock in any funds in CDs, except for my laddered emergency fund, because I didn’t recognize that I should have (or at least should have considered it). It wasn’t an error of judgment but one of ignorance.

Everyone knew rates were going to be cut but not everyone realized they should’ve considered putting a little bit away in certificates of deposit. (I can confidently say that because I know I didn’t) So, the next time you think rates are going to stagnate or fall, lock a little away in CDs.

The Fed did what everyone expected this past week, cutting the federal funds rate by 75 basis points to 2.25%, a little less than what the market wanted (they wanted a full 100 basis point cut down to 2%). The federal funds rate has gotten a lot of press lately and many people have started to understand how the Fed Rate personally affects them. Some have been confused between the federal funds rate and the federal discount rate, which I tried to explain in the past, and wanted to learn why the fed rate affected the stock market, but overall I think it’s relatively well understood. The other popular rates that aren’t as well understood are the Prime Rate, the London Interbank Offered Rate (LIBOR), and the 11th District Cost of Funds Index (COFI).

Prime Rate

What is it? The prime rate is a generic term but in the US it primarily refers to the the Wall Street Journal Prime Rate. It is “the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks.” [Source: Wikipedia] Usually you can expect the rate to be about 3% higher than the Federal Funds rate so when the Fed drops its rates, you can expect the Prime Rate to fall as well (but not always). WSJ prints this rate about once a month.
Why does it matter? The Prime Rate is often the rate you see associated with credit cards, car notes, and all other types of consumer debt. For example, a card may have their variable purchase and balance transfer APR pegged to the Prime Rate plus 4.99%, so that rate will be the Federal Funds rate plus around 8.99%. Since the Fed cut the rate by 75 basis points, you should expect a similar fall in your interest rates. The Prime Rate is published by WSJ so it will lag the Fed by a little bit, so you might not see the lower rate for a little while.

London Interbank Offered Rate (LIBOR)

What is it? The LIBOR is “a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market).” [Source: Wikipedia] In other words, it’s the Fed funds rate in London. Some other notable differences are that it’s a daily rate, announced after 11 AM by the British Bankers Association, and is an average of rates on inter-bank loans of up to 1 year with contributor banks. It’s a lot like taking a snapshot of the crowd at a sporting event, you get close but it’s obviously a continually moving target. Another difference between the two rates is that with the Fed funds rate you’re talking about the target that the Fed is trying to hit by adding liquidity. With the LIBOR, it’s the actual rate being charged and not a target. While it is an academic difference, it’s a difference nonetheless.
Why does it matter? Some adjustable rate mortgages are actually linked to the LIBOR, such as LIBOR + 2.75% or LIBOR + 2.0%; so when the LIBOR moves around, it can affect what your ARM is adjusted to.

11th District Cost of Funds Index (COFI)

What is it? Last but not least, we have the 11th District Cost of Funds Index (COFI), an index I never heard of before researching this article. The COFI is a little more complicated and is “computed from the actual interest expenses reported for a given month by the Arizona, California, and Nevada savings institution members of the Federal Home Loan Bank of San Francisco (Bank) that satisfy the Bank’s criteria for inclusion in the COFI (COFI Reporting Members).” [Source: FHLBank San Francisco] Like the Prime Rate, this rate is reported on a monthly basis but two months behind (so the January value is reported in March).
Why does it matter? Again, it’s an index used to adjust mortgages and other loans and it’s popular because it lags the market and is a stable measure. This means that it’s good when the rates are increasing, since it lags, but not as good when the rates are falling, since it lags. The reason why its stable is because it includes more factors such as loans from savings and checking accounts, CDs, etc.

Hope that clarifies things just a little bit more…

Nearly 1 year ago I wrote 50 Fun Facts about Credit Cards, a post that was very well received, so I figured why not follow that up one year later with another 50 fun facts post - this time talking about banks. I like reading about history so the first batch of facts revolve around the central bank, starting with the First Bank of the United States and ending with our current Federal Reserve system (you can see the progression!), then wash that meal down with some more entertaining facts like some other firsts, a few mind boggling statistics, and then some fun stuff like bank robberies and banking sponsorship information. It was fun (and educational) putting it together so I hope you enjoy reading the list. (much like last time, I added in a few bonus facts!)

Central Bank History

• The first chartered bank of the United States was the First Bank of the United States, formed in 1791 by The United States Congress.
• If you want to visit, it’s located at Third Street, between Chestnut & Walnut Streets in Philadelphia; but it’s not open to the public.
• The bank was the brainchild of then-Secretary of the Treasury Alexander Hamilton, who proposed that the bank sell $10M in stock to help establish its initial funding. Of the original $10M, $2M would be purchased by the United States. However, since the newly formed United States didn’t actually have $2M, the bank would loan the government $2M that the government would pay back in ten annual installments.
• The creation of the bank was lumped in with an increase in excise taxes on liquor and the minting of paper currency. In order to push the bill through opposition to the excise taxes from southern members of Congress, Hamilton brokered a deal to support a bill that would move the capital from Philadelphia to what later would become Washington, D.C.
• The First Bank of the United States was not the first chartered bank in the territory that is now the United States, that distinction belongs to the Bank of North America. That bank was chartered on the last day in 1781 by the Congress of the Confederation.
• The Bank of North America would be succeeded by the First Bank of the United States.
• The Bank of North America, with national bank charter #1, still exists today and is held by Wachovia, N.A. Wachovia still operates a branch at the northwest corner of 6th and Chestnut in Philly, the site of the original bank.
• As you may have expected, that Wachovia branch is the longest continuously operating branch bank in the US, having been there since 1781.
• The Second Bank of the United States was chartered 5 years after the charter for the First Bank of the United States expired and the Second Bank was again located in Philadephia.
• Why a Second bank if the government allowed the charter for the First Bank to expire? War! The US found itself unable to finance the War of 1812 and thus chartered a Second Bank of the United States.
• There was quite a bit of controversy around the bank, there’s plenty of resources out there to read about it if you’re interested so I’ll skip it here, but eventually it went bankruptcy five years after the expiration of its charter in 1836.
• If you want to visit, it’s located on Chestnut Street between 4th and 5th Streets and it’s open to the public free of charge( National Parks Service info page).
• There was no Third Bank of the United States, or any central bank, for 80 years following the expiration of the Second Bank’s charter. That’s when the Aldrich plan, named after Republican Senator Nelson W. Aldrich of Rhode Island, of fifteen regional central banks was floated and discussed.
• Eventually, the Federal Reserve Act of 1913 instituted 12 Federal Reserve banks, headed by a seven member Federal Reserve board plus a single US currency, a Federal Reserve Note.
• The twelve Federal Reserve banks are located in Boston (1), New York (2), Philadephia (3), Cleveland (4), Richmond (5), Atlanta (6), Chicago (7), St. Louis (8), Minneapolis (9), Kansas City (10), Dallas (11), and San Francisco (12).
• All nationally chartered banks are required to become members of the Federal Reserve System, which means they must buy non-transferable stock in their regional Federal Reserve bank.
• In the 1930’s, the Federal Reserve Act was amended to include the Federal Open Market Committee that consisted of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the regional Federal Reserve banks.

Other Firsts (and Lasts)

• Flatbush National Bank of Brooklyn, New York was the first bank to issue a credit card in 1946.
• The first bank to be managed entirely by women? First Woman’s Bank of Tennessee, founded in 1919. Unfortunately, its founder, Brenda Vineyard Runyon, was unable to secure a successor after her health began to fail and it was eventually absorbed by First Trust and Savings Bank of Clarksville in 1926.
• Curious to see a list of all the defunct banks in the United States? Check out this page on Wikipedia, it’s accuracy isn’t known.
• As of this writing, the last bank to close was Miami Valley Bank in Lakeview, Ohio on 10/4/2007. It was closed by the Ohio Department of Commerce, Division of Financial Institutions.
• The one right before that was the much more publicized NetBank, shuttered only a few days earlier on 9/28/2007.
• The first bank Jesse James’ robbed was the Clay County Savings Association in the town of Liberty, it was the first armed robbery of a US bank after the Civil War.
• Barings Bank, founded in 1762 and helped finance the Louisiana Purchase, Napolean’s war effort, and other notable historic events; collapsed after Nick Leeson’s losses of £827 million in Singapore futures contract speculation. It was sold to ING for £1! Barings Bank had been the oldest merchant bank in the City of London. (This was the subject of Rogue Trader)

Stats and Figures (Some Mind-boggling)

• According to the Federal Reserve System’s National Information Center, the top five bank holding companies (in order) are Citigroup, Bank of America, JP Morgan Chase, Wachovia and Taunus (Deutsche Bank).
• As of 9/30/2007, the top five hold $6,775,079,249,000.00 in assets. That’s six trillion, seven hundred seventy-five billion, seventy-nine million, two hundred forty-nine thousand dollars of assets.
• Three of the top five are headquartered in New York City, NY (Citigroup, JPMorgan Chase & Taunus). Bank of America and Wachovia are headquartered in Charlotte, NC.
• In 2006, there were 1,279 savings institutions according to the FDIC. 435 were supervised by the FDIC, the balance were supervised by the Office of Thrift Supervision (OTS).
• In 2005, there were 7,527 FDIC-insured banks with 72,775 branches and 80,302 offices at year end.
• In 1934, there were 14,146 FDIC-insured banks (unknown number of branches) at year end.
• At the end of 2005, the total assets of all FDIC-insured banks was $10,090,355,277,000.00. That’s ten trillion, ninety billion, three hundred fifty-five million, two hundred seventy-seven thousand dollars.
• At the end of 1934, the total assets of all FDIC-insured banks was $46,437,000,000.00. That’s a mere forty-six billion, four hundred thirty-seven million dollars. Inflation adjusted according to the Bureau of Labor and Statistics and you’re talking about $676,801,950,000.00 in 2005 dollars.

Consumer Protection

• If your bank has FDIC insurance, your deposits are protected up to $100,000.
• To check if your bank is FDIC insured, use the FDIC’s Bank Find tool. Just because they say they are insured doesn’t mean they are.
• Credit unions deposits are protected under the National Credit Union Administration.
• To check if your credit union is NCUA insured, use the NCUA Find A Credit Union tool.
• The insurance coverage increases to $250,000 if the account is a retirement account.
• There are over a dozen Fed Regulations and laws that protect consumers, a page on the Chicago Fed website has a list of all of them. You will notice a few popular ones such as the Fair Credit Reporting Act and Regulation CC (how long a bank can hold your check funds as they process). It may make for some dry reading but it’s useful information to know.
• I wanted to specifically call out Regulation AA, Unfair or Deceptive Acts or Practices, which governs the procedures a consumer should follow to report unfair or deceptive acts or practices performed by a bank with respect to the extension of credit. This is especially appropriate nowadays but the regulation spells out specifically what you should do.

Actually Fun / Interesting Facts

• Bank of America has merged/acquired plenty of other banks, the most prominent of which was the Bank of Italy. In fact, when Bank of Italy merged with Bank of America, it was the Bank of Italy’s founder that served as its head. So you could say that Bank of America could’ve just as easily been Bank of Italy!
• The largest cash robbery, about $18.9 million) to have taken place in the United States was called the Dunbar Armored robbery, which took place at the Dunbar Armored facility in Los Angeles, CA. While everyone was caught, about $10M of the stolen loot was lost. It was an inside job and no bank was involved but it’s still worth mentioning, don’t you think?
• The largest cash robbery of a bank was the Loomis Fargo bank robbery in 1997, in which $17.3 million was stolen from a regional office vault in Charlotte, NC. Again, another inside job and the thieves were caught (so was 95% of the cash).
• Moments before the US started bombing Baghdad, nearly $1 billion dollars was stolen from the Central Bank of Iraq and considered the largest heist in history. $650 million was later recovered in the walls of one of Saddam’s palaces but the balance is still missing.
• The N.A. after the name of a bank indicates it’s a national bank, it stands for “National Association.” It means that the bank is chartered by the Office of the Comptroller of the Currency.
• The FSB after the name of a bank indicates that it is a Federal Savings Bank or a Federal Savings Association. It differs from a bank in that it’s overseen by the OTS and takes deposits for the purposes of lending it out for residential mortgages.
• Savings and loans are slightly different, they’re like FSBs/Thrift banks but for all types of mortgages, not just residential ones. The distinction is very slight and the lines are blurring among the three types.
• The North Hollywood shootout occurred after the pair of heavily armed thieves robbed a branch of Bank of America.
• The Riegle-Neal Interstate Banking and Branching Efficiency Act, passed in 1994, has a provision that states no bank may hold more than 10% of the all deposits in the United States. The bill also made it possible for banks to buy other banks headquartered in other states, this was previously illegal.
• Bank of America is the official sponsor of the United States Olympic Teams, the National Football League, the National Hockey League, NASCAR (National Association for Stock Car Auto Racing), Major League Baseball, Minor League Baseball, and even Little League Baseball!
• In the NFL, there are currently five stadiums sponsored by financial institutions. M&T Bank (Baltimore Ravens), Invesco (Denver Broncos), Lincoln Financial (Philadelphia Eagles), Bank of America (Carolina Panthers), and Raymond James (Tampa Bay Buccaneers).
• In the NBA, there are currently five six arenas sponsored by financial institutions. TD Banknorth (Boston Celtics), Conseco (Indiana Pacers), TD Waterhouse (Orlando Magic), Quicken Loans (Cleveland Cavaliers), Key Bank (Seattle Supersonics), and Wachovia (Philadelphia 76ers).
• In the MLB, there are currently five stadiums sponsored by financial institutions. Chase (Arizona Diamondbacks), Comerica (Detroit Tigers), Citizens Bank (Philadelphia Phillies), PNC (Pittsburgh Pirates), and Safeco (Seattle Mariners).
• In the NHL, there are currently eight arenas sponsored by financial institutions. Wachovia (Philadelphia Flyers), Mellon (Pittsburgh Penguins), TD Banknorth (Boston Bruins), HSBC (Buffalo Sabres), Scotiabank (Ottawa Senators), BankAtlantic (Florida Panthers), Scottrade (St. Louis Blues), and Pengrowth (Calgary Flames) RBC (Carolina Hurricanes).
• Blueprint for Financial Prosperity is not sponsored by any bank, but would certainly entertain offers!

The federal funds rate is the interest rate that banks charge other banks when lending money to them. One of the consequences of having a reserve limit is that sometimes banks, in trying to stay as close to that limit as possible, may go under it and thus need to borrow some money to boost their reserves. This rate is set by the Federal reserve.

The federal discount rate is the interest rate that the Fed charges banks when it lends the bank money. This amount is higher than the Federal Funds Rate so it’s used as a last resort for banks needing some cash to boost their reserves.

In an earlier article on how the Fed rate affects the stock market, I made an error of omission by mentioning only the federal discount rate and wanted to take the opportunity to clear that up.

So I was trying to figure out how long ABA Routing Numbers are valid for and accidentally unearthed a whole slew of facts I never knew about the little digits identifying your bank on your checks:

ABA stands for American Bankers Association and they come up with the ABA Routing Numbers, here’s a boring and long PDF file all about it.

What do the numbers stand for?
The first four numbers are the Federal Reserve routing symbol, which specifies which of the twelve Federal Reserve banks (including city) that the check was printed at. The next four digits specify your bank and the last digit is the checksum digit, a calculation I explain next.

Did you know that there is a checksum validity test?
For the non-nerds out there, a checksum just means you basically add the numbers together after doing some other mathy stuff and the result is a checksum. It’s a way to figure out if something was corrupted in the communication. To calculate the checksum for the ABA Routing Number, multiply the first digit by 3, the next by 7, the next by 1, and then repeat in that order. A valid ABA Routing Number’s checksum will be evenly divisible by 10.

So if you take Emigrant Direct’s ABA Routing number of 226070319:

Looking for a Bank With Its Routing Number?
Ta da! You can look it up at a Federal Reserve Financial Services website. I wonder if they give better rates at ABA#: 2839-7842-5.

I’m sure there are other great ABA facts but those are some to get you started.

There is a limit of six transfers, ACH or otherwise, per statement cycle on savings accounts as mandated by the Federal Reserve board Regulation D, which defines the rules of each account type and its reserve requirement. Why is this important? With the advent of online savings accounts and the chase for a better interest rate, ACH transfers into and out of savings accounts are becoming more frequent. Before online savings accounts like ING Direct and Emigrant Direct, when you actually had to visit a bank to initiate an ACH transfer; a limit of six transfers on a savings account wasn’t really a problem. In fact, you’d be hard pressed to initiate six in a year, let alone six within a statement month. Now, you can initiate six ACH transfers within a statement cycle without really realizing it and that can be cause to terminate your account!

The reason for this is because your savings account is classified as a “saving deposit” and the reserve requirement on a “saving deposit” is 0%, compared to something like 10% on a “transaction account.” A reserve requirement is how much of the balance the bank must keep in reserve and not give out in loans. So when Emigrant Direct gets your $1,000 in your saving account, it doesn’t need to hold any of that in its reserves, it can loan all thousand dollars because the reserve requirement on a savings account is 0%. (hence the attractive rates) On a checking account (a transaction account) however, they must retain 10% of the balance on hand because the assumption is you will be drawing on your funds more frequently.

So, why did I look this all up? Because when I was reading the Emigrant Direct’s disclosure statement (link), I stumbled upon this rule:

Federal regulations require that no more than six (6) transfers per statement cycle may be made to (1) an account at another bank or financial institution, including your External Account, (2) to another EmigrantDirect account or (3) to a third party by means of a preauthorized or automatic electronic transfer. We reserve the right to close your Account for violation of the above restriction.

This is nearly an exact copy of Section 204.2(d)(2) of Regulation D of the Federal Reserve Board’s definition of a “savings deposit:”

the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle . . . to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order, or instruction, and no more than three of the six such transfers may be made by check, draft, debit card, or similar order made by the depositor and payable to third parties. (reference)

So, be aware of the six transfer limit on online savings accounts or you might be in for a surprise!