Some Principal Things to Know About Banking
Think you can’t lose any of your principal in a bank deposit? Think again. A simple act such as withdrawing your funds early can mean a partial loss.
Think most banks are alike, adhering to fairly standard rules about sending out interest checks and applying fees and charges? Wrong again. Financial institutions vary widely. Some of their hard-to-fathom policies and procedures can cost you money, time and irritation.
Now that banks and thrifts are enjoying a surge in popularity--about $60 billion was poured into savings instruments during the first quarter of 1995--it may be worth reviewing some of the myths and realities of bank deposits.
Myth: You can’t lose your principal in a federally insured bank deposit.
Reality: Early withdrawal penalties on certificates of deposit mean that you may. The amount of principal you lose depends on the institution, the interest rate and the size and duration of the deposit. Typical certificate of deposit contracts stipulate that early withdrawal penalties will amount to between one month’s and three months’ worth of interest on a short-term CD (one year or less) and six months of interest--or more--for longer-term deposits. If too little interest has accrued to pay the penalty, the penalty is paid from principal.
Take, for example, a $100,000, 18-month CD that pays 7% annually and has a six-months’interest penalty for early withdrawal. If the depositor pulls the money out in three months, she’ll pay about $3,500 in penalties--$1,750 in principal and $1,750 in interest.
Advice: Early-withdrawal penalties, once required by law, are now discretionary. If there’s a chance you’ll have to withdraw money early, shop for a CD that doesn’t call for the penalty or that has a smaller fee. If the withdrawal was due to a personal emergency, talk to your banker and ask to have the fee waived. The bank may not always comply, but it can.
Myth: Banks don’t negotiate. The interest rates advertised in the paper are what they’re willing to pay. If I do something that triggers a fee, there’s no way out of it.
Reality: Bankers will negotiate over almost anything. You want a higher rate than what’s advertised? Ask for it. You don’t want to pay annual fees on your bank card or want a lower rate? Say so. You think a fee or charge is out of line? Ask that it be reversed.
Realize, however, that banks tend to negotiate most with those who have large balances and-or several “relationships” with the institution. If you have a small checking account balance and little else, it’s going to be tough to persuade the bank to forget about the bounced-check fees.
Advice: If you want more bargaining power, consider doing all of your banking with one institution. Consolidate your accounts, suggests Virginia Stafford, a spokeswoman with the American Bankers Assn. in Washington. Bankers “are trying to establish a long-term relationship with you,” she says. “If you can offer them reasons to negotiate--like you have several different accounts--you’re better off.”
Myth: Once I lock in a CD rate, the bank can’t lower the rate--or return my money--before the end of the contracted period.
Reality: There are a few cases where that’s not true.
If the bank or thrift is declared insolvent and sold by federal regulators, the new owners are allowed to change interest rates paid on time deposits.
For example: You deposit $10,000 in a five-year CD yielding 8% at Bank A. Two months later, Bank A fails. Regulators sell Bank A to Bank B. Bank B sends you a letter saying it has taken control of Bank A and that it plans to lower the interest rate on your deposit. You are given the opportunity to withdraw your deposit, penalty-free, or accept the new rate.
In addition, some thrift and loans offer “investment certificates” rather than certificates of deposit. ICs are almost identical to CDs and are often called CDs, but there’s one important difference: An IC can be “called” at the issuer’s discretion. In other words, the thrift can return your money, with interest accrued to date, without being forced to pay throughout the contracted term. This doesn’t happen often--indeed, many thrifts have never called one. But they can.
Advice: California thrift and loans were recently given the right to offer CDs rather than ICs. If you want a guarantee that the rate won’t change as long as the thrift is solvent, make sure you get the CD.
Also make a point of checking the health of the institution before you deposit. Rate alterations on CDs occur when a financial institution
fails. If your deposits are only with well-capitalized companies, your risks will be minimal.
Myth: Different banks and thrifts are nearly interchangeable. They all offer the same accounts, pay interest in the same ways and provide the same protection for deposits.
Reality: Decades ago, that was true. No longer.
The new realities hit home with Carl Minuskin, a self-employed Los Angeles-area businessman, late last year when he pulled his money out of stocks and bonds and began to invest nearly exclusively in bank deposits. One bank sent checks out substantially after interest was accrued. Another paid early, allowing customers to have their interest checks the day the money was earned. A third paid only a portion of the first month’s interest, promising to pay the remainder when the account matured. Another failed to send out interest checks at all, allowing the interest to accrue in the account, which pushed the balance above the federally insured $100,000 limit.
Advice: Ask about bank policies and procedures before you open an account. Sometimes knowing when and how interest will be paid is as important as knowing the rate.
In addition, if you deposit more than $100,000 in any one institution, make sure you understand the rules. Most banks can provide you with a booklet titled “Your Insured Deposit,” which can help.
Myth: Any investment I buy from my bank is federally insured.
Reality: Banks are selling a wide array of investments in their branch offices these days. Only deposits are insured to $100,000 by the federal government.
Money market mutual funds, bond funds and other investments are not federally insured, says Ken McEldowney, executive director of Consumer Action in San Francisco.
Advice: Do not rely on verbal assurances that your money is safe. Read the written disclosures provided to you by the bank. Pay particular attention to sections titled “Risks.” If you are unsure about whether the investment is federally insured, ask the bank representative to point out the section in the written disclosure that says it is--or isn’t.
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Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kristof@news.latimes.com on the Internet.
