Bank Fees as Simple Interest
I mulled over an idea I had about if banks had to tell you what their service charges were as an interest rate whether folks might get more upset about how much they are being gouged.
Right now Bank Fees are quoted as a dollar value like $15.00 for our Extra Special Banking Service, etc., etc., however what if we do a little simple arithmetic (Michael James could do the more interesting compound interest version of this equation)?
Assume that over a year you hold a balance of about $500 in your chequing account (which is where you do most of your banking). Let us also assume that you get paid no interest on your balance (that is no stretch right now), but you get charged $12.95 a month for the Extra Special Banking Service offered by Leech Banks.
Let’s wander through the calculations:
- If you pay $12.95 a month in service fees (excluding other fees for cheque printing, non-bank ATM withdrawals, etc., etc., etc.,) that adds up to $155.40 in a year for service charges.
- Assuming we keep the balance in our chequing account at $500.00
- If you use a simple interest model (compounded once a year), you then have paid a 31.08% simple interest charge for this service.
Think about the number you just saw, you lost over 31% of your principle due to your bank withdrawing service charges. This value would be higher if you had a monthly compounding period (I think). If you carried more money in your account this might be a lower rate (in my bank if I hold over $3000 in my chequing account I then don’t pay at all), but if you kept a lower principle the rate would even be more astronomical (if you held a balance of less than $200 it would in fact be closer to a 100% simple interest charge).
Would you use a bank that gave you -31% interest on your chequing account? Would you go anywhere near a bank that advertised that service?