We are frequently told that banks and other financial companies try to help their customers avoid financial problems and we are also told they charge customers on the basis of how the company views the financial risk that the customer presents. The logic of that seems clear but it puzzles me that the banks seem so eager to push their customers into a far riskier financial situation as soon as they have any financial difficulty.

It should be obvious to any normal person that if someone has had difficulty in any one month they need even more money the following month to get back on track. Most people have a regular and fairly stable income and most of us would have regular expenses that we balance with our income.

The majority of people do everything they can to avoid these debt problems but the reaction of banks to this difficult situation for their customer is invariably to reduce their available cash by imposing charges which are then taken from the account without any opportunity for the account holder to manage the situation and avoid further financial difficulties.

The situation is then that, invariably, the customer has even less money available the following month to cover their expenses, to pay bills and make a payment to catch up for the previous missed payment. It is hard to see how the banks could see this as helping their customer overcome their difficulties.

This slippery slope is one many of us will have experienced with the result that as each month goes by more and more charges are applied and it gets ever harder to balance the budget and get the account back in credit.

With every additional charge it becomes more and more difficult and it can feel like you will never get straight again.You pump whatever money you can find into the account to get straight but charges just swallow it all up and still you owe more. It doesn’t take too many months like this to find yourself in a financial hole that feels like you can never climb out of.

We all live a fine line between comfortably affording our lifestyle and financial disaster. For many people, it wouldn’t take much to push them over the edge and the Bank’s way of  ‘helping’ their customers who hit a difficult patch seems to be just about the worst possible help you could have. The phrase that comes to mind is, ‘”With friends like that, who needs enemies”.

Everything may seem rosy today but none of us know what is around the corner. Financial circumstances can change and it doesn’t always have to be a big change to have a large impact on your financial situation. If you do not have significant savings to give you a comfort zone and your expenses are broadly in-line with your income, you could be at risk of financial problems if anything changes.

Many of us buy a lottery ticket with the hope that maybe this time we might be lucky and gain from a big win. The reality is that it is far more likely that something will happen which leads you towards financial disaster than it is that you will be one of the big winners on the lottery.

We need to prepare for the worst and by doing so we may avoid it ever happening. Take some simple steps to get your monthly budget in reasonable shape.

1. Build up a readily available cash reserve for any financial emergencies.
2. Avoid using credit cards for long term debt.
3. Make sure there is always enough money in your account to cover any payments and if there is not then at least cancel the direct debits which will lead to charges if the payment fails to clear. Find another way to make the payments.
4. Carry out an analysis of your financial situation which looks at income and expenditure to see just how well off you really are.
5. Prepare a budget that covers all your outgoings and expenses and has at least a little surplus in reserve. If your budget doesn’t balance do what you can to reduce your spending and get your budget back under control.

Remember that you need the money far more than your bank does but if you lose control they will take advantage of your situation and rip you off left, right and centre. They do not care about you. All you are is a cash cow to them and they will make your financial situation far worse. They will increase your financial riskiness and you will find your interest rates on debts rising as the financial industry does everything they can to, apparently,  try to bankrupt you.

Don’t let it happen to you.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

There has been interesting news on the question of bank charges with the announcement by RBS-Natwest that they will be reducing some of their banking charges from the 1st October 2009. From that date the charges will be as follows:-

* Unpaid item fee reduced to £5 from £38 (maximum £50 per month, reduced from £114 per day)
* Paid referral fee reduced to £15 from £30 (maximum £90 per month)
* Guaranteed card payment fee reduced to £15 from £35 (maximum £90 per month, reduced from £105 per day)
* Maintenance charge reduced to £20 from £28
* Unarranged borrowing rate of interest reduced to 19.24% EAR

Announcing the moves, the new CEO of the UK Retail Bank, Brian Hartzer, said: “This is good news for customers, not least because the fees for unarranged borrowing have been an area of ongoing concern for them. As we look ahead there are many issues to consider, but we thought it was time to move this particular customer concern forward by cutting our charges.”

This is a positive move and it is interesting for several reasons. Firstly, the banks have been arguing throughout the last few years that the penalty charges they make are fair and represent the true cost of the additional work involved with dealing with them. So, we must assume from this that RBS has somehow found a way to reduce their costs significantly in relation to these items. If that is the case then the banks shareholders should be very concerned that the Bank has previously been so inefficient that it cost so much for a computer to print a letter.

An alternative view is that the bank expects to lose the case currently under appeal to the Law Lords, now known as the supreme court. It has always seemed that these charges were unfair and the banks were profiting from them and it would be a huge disappointment to millions of citizens if somehow the ruling were to say that the OFT could not rule on the fairness of bank charges. We must await the result of the Law Lords decision expected in the autumn but in the meantime this must be seen as a positive step and a recognition by RBS that their charges were too expensive and in most people’s opinion, regardless of the legal opinion, unfair.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

While we all await the result of the appeal by the banks to the House Of Lords over the bank penalty charges case charges continue to be applied. For many people these charges make a huge hole in their financial budgeting and avoiding the additional costs of bank charges can be crucial.

Direct debit payments make life much easier and simplify the task of regular bill paying but they have a sting in their tail if you are running close to your agreed overdraft limit. An attempted payment of a direct debit can leave you out of pocket and still have the debt to pay. An example would be that we have a credit card that requires a direct debit payment of £50.00.

Unfortunately, for whatever reason, there is not £50 available to be withdrawn from your bank account. The direct debit is requested. The bank makes the payment but then discovers that the money wasn’t there and reverses the payment. The net result is that the payment has not been made but the bank will apply a penalty charge of £35.00 for attempted withdrawal when funds were not available.

The credit card company will charge you £12.00 for failing to make a payment and if you were near your credit limit on the card they might charge you a further £12 for going over your credit limit as a result of the payment not being made. So, for a bill that has not been paid you have been charged £35+£12+£12=£59.00 for nothing. You still have to make the payment of £50 to the credit card on top of all these charges and the final cost of paying £50 off your credit card will be £109.00.

There are a couple of lessons to be learned here. One is always keep enough in your current account to cover all your expected direct debits but the other lesson is that if you are sure a direct debit is going to fail then cancel it before it goes through. Make other arrangements to pay the debt but avoid the direct debit failing because that just costs you money for no gain whatsoever, except by your bank and the credit card company. I think it is a reasonable assumption that you need the money more than they do.

The final lesson is simple. The credit card company is not your friend. They are interested in you ONLY for the profit they can make from you. Work towards reducing your debts so you are in control of your life and your money, not them.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)