There are a few interesting differences between the way English banks and American banks seem to function on a day-to-day level. I have been trying to decide which is best, but I have come to the conclusion that ultimately each has its good and bad points.

Overdrafts

In America, it seems to be quite unusual to have an ‘agreed overdraft limit’. Rather, a checking (current) account holder can have ‘overdraft insurance’, which seems to cover  short-term budgeting errors.

Overdrafts are abused in England; some people take them as extensions of their paycheck and routinely ‘live in their overdrafts’, to the point that a paycheck merely takes them back to £0, before they start downwards into it again. Some don’t even make it back that far up the ladder month to month.

Banks love this of course. The interest charged can be as high as 30-odd percent, or in the case of the HBOS group, £1 per day in lieu of interest. Add that up over the course of a year or more and that is serious money being thrown down the drain for what is nothing more than dreadful money management skills.

My agreed overdraft is £1,500, and the first £250 of that is interest free. I haven’t entered it since January, but it is handy buffer for budgeting errors. The £250 interest free part comes with the account that I have, but the additional £1,250 beyond that just grew over the years with my account; Every once in a while they would push it a little further. It seems to have finally settled at the figure it is on.

Peculiar to my bank there is also a facility beyond the arranged overdraft called ‘Personal Reserve‘. It’s a £500 overdraft after your overdraft. Horrible little thing, it costs £22 per day to go in it, but I suspect if you need it, then it is handy to have.

ATMs

Another thing I find peculiar about the American banking system is fees for using different banks’ ATMs. I have never been charged anywhere in the UK for using an ATM that didn’t belong to my bank – beyond those convenience stand-alone ATMs you find in small shops.

This could just be scale. The UK ‘grew up’ as one large piece of infrastructure, whereas America has been hacked together by different institutions in different states at different times. Or is it just one further method of extracting money from the unwary consumer?

Cheques

I have written precisely 1 cheque in the last 5 years – no kidding! Cheques are pretty much extinct here in the UK. Shops have all but stopped accepting them as a form of payment. Yet I have never heard of a personal banking customer in the UK being charged for cheques -  this seems ‘the norm’ in the US? Companies such as Checks In the Mail even seem to print cute designs on them.

Online Billpay

Various blogs extol the virtues of using this system, and if you’ve only had doing the cheques yourself as prior experience, then I can understand. But it seems lightyears away from our Direct Debit system. If the company you are paying isn’t wired into the bank, the bank physically print and mail the cheque? Amazing.

Direct Debit while appearing insecure on the outside, is actually quite brilliant. Take my credit card as an example:

When I got it, I ticked the box on the online account to set up the direct debit. I punched in my bank account and sort code, and set to pay £120 a month. Just this month, it’s now set to “pay in full”.  I could equally set it to “pay the minimum” or somewhere in between. The billing party then submits a Direct Debit request through the banking network, and my bank sends – electronically – the amount requested.

If anywhere along the line there is a screw-up, the Direct Debit Guarantee immediately resets the transaction. I can cancel the Direct Debit authorisation at any time from my Online Banking menu, and ultimately, it’s a stroke of genius.

About the only thing you cannot set up a Direct Debit for in England is your groceries.

Fees

It seems there are banking fees abound in America – even if you run your account right. A fee for even just having a checking account. A fee for checks. A fee for a debit card. A fee if you go over a certain number of transactions. A fee if you have less than a certain amount in your account. A fee for this, that and the other.

I am shocked by this. About the only fee I have paid in the last 10 years for banking has been the odd bit of interest for going into my overdraft here and there. I’ve never paid for cheque books, debit cards, the account itself or anything else.

Perhaps I am just viewing the UK system with rose-tinted spectacles, or the US system isn’t nearly as bad as some blogs make out. Or, perhaps, I’m spot on; in which case, for once, I am glad to live in the UK!

I’m sure at least one of my American readers will set me right soon enough if I have got it wrong.

The postman dropped the usual rainforest through the door this morning and after sorting the wheat from the chaff, I was left with my LoveFilm DVD delivery, my PC Pro subscription, a Vision Express money-off voucher and something from Barclaycard.

It’s a bit early for my credit card statement, so I ripped it open wondering what they wanted. Within was a letter and attached, 2 cheques.

The Offer

“Hello Mr Five Pence Piece,

Your Barclaycard is ideal when you need to buy something. We can also help you manage your finances with a 0% balance transfer offer (a 2.5% handling fee applies). Moving balances from your other cards to your Barclaycard could reduce the interest you pay and make managing your money easier.”

Sounds pretty good so far, doesn’t it? No hard sell, and they’re offering to save me money.

“Here’s how it works.

0% interest until March 2010 (a 2.5% handling fee applies). [...] Any outstanding balance after your March 2010 statement will go back to your standard purchase rate of 12.9% p.a.”

Where’s The Catch?

Still struggling to see the catch? Well, based on what is written in the letter and copied above, there isn’t one. Transfer a balance, pay no interest on it until March 2010 for just a 2.5% one off fee. If you manage to pay it off before or by March, then it’s 0%. Have a little bit left after that, they’ll charge you your standard purchasing rate on the remaining balance.

That really could save you money off of other cards, so what’s the problem?

Check the Small Print

Flipping over the letter to the small print on the back, my eyes fell on the ‘Allocation of Payments’ section. Here it is:

Payments you make are applied in the following order:

• Default Charges and interest on Default Charges
• Promotional Balances (if you have more than one promotional balance your transferred balances are paid before promotional purchases, then open ended offers first, then lowest rate first, then oldest offer before newer)
• Interest and other charges
• Standard balance
• Cash balance and Barclaycard cheques (unless there is a promotional rate).

Confused? Don’t worry; that’s the idea.

Picture the Scene

I’m going to use Selina again, my imaginary friend from the Dig Yourself Out of Debt series. I’m sure she won’t mind too much.  As we know, she has 2 credit cards; One has a £5,000 balance at 14.9%, and another with a £1,000 balance at 24.9%.

Her new Barclaycard for which she’s just received these cheques didn’t have a promotional rate to begin with, but she had been using it on and off to buy stuff she needs when she runs out of cash towards the end of the month before learning how to be more sensible and start digging herself out.

The purchase rate on her Barclaycard is 6.9% (non-promotional) so carrying a balance wasn’t that big of a deal to her, and her balance currently stands at a not too terrible £500. The minimum payment is just £10 and each month it costs her around £2.50 in interest.

A little knowledge is a dangerous thing. She’s just caught the money saving bug, so decides she’d be far better off by transferring her expensive £1,000 balance (at 24.9%) onto her Barclaycard, and paying it off before March 2010. She writes the cheque, and puts it in the post.

Job done. It cost her £25 to transfer her £1,000 balance (remember that 2.5% ‘handling fee’?) but she is saving £20 every month in interest fees from the old card.

So far, so good.

It’s Behind You!

Seen where this is going yet? Selina rumbles along paying off amounts she can afford each month. Sometimes more than the minimum, but never the maximum amount as she cannot afford anywhere near that. She feels good knowing that she is spending out less money than she was, even if it takes here longer than March 2010 to pay it all off.

But is she really?

The minimum payment hovers around the £70 mark. Sometimes she pays up the minimum, sometimes she stretches that to £100. Here’s the problem: From the list of the way payments are applied above, Selina is currently paying off her balance transfer. This might well be at 0%, but she is still accruing interest on her ‘old’ £500 balance from purchases, and will continue until she pays off every last penny of the balance transfer!

I’m still wondering if a balance transfer cheque (if not paid off in full by the time the promotional rate expires) reverts to the “Cash balance and Barclaycard cheques” section of payment allocation. If they do, then they’ll sting you for even more interest while you then pay off your standard balance – it’s not terribly clear (and isn’t that just the point).

Imagine how much worse this would be if she’d taken a cash advance before doing the transfer. With it’s 3% fee and 28.9% interest rate, she’d accrue interest on that as well as her old £500 balance month in, month out. The only way she could stop paying interest is to stump up £1,500 in one go and pay off the card in full.

Credit Card Companies Are Not Your Friend

Despite the friendly wording of their letters (if you’ve not been naughty at least), they are not your friends. They are businesses, and businesses are out there to do one thing: make lots and lots of profit for themselves and their shareholders.

I may appear to be picking on Barclaycard but rest assured all credit card companies are the same. It’s just they’re the first this year to have sent me any so were timely cannon-fodder.

So what did I do?

Putting Selina back in her room – after all the cheques were mine not hers in reality – what did I do with them? I already have a promotional balance transfer on my card, and no purchases. I don’t have another credit card with a balance that isn’t paid in full every month, so I put them in the shredder.

To truly and safely benefit from this 0% deal, my Barclaycard would have to have a balance of £0.00.

To stay safe and get the most out of your credit card, stick to one promotion at a time, and don’t mix when it comes to purchases and balance transfers. If you have a card you got for a balance transfer, do not spend on it. Do not draw cash out on it. Freeze it in a block of ice and keep it in the freezer if you don’t trust yourself.

One thing is for sure – mixing standard and promotional rates will quickly make you poor and that’s what they want. The more you’re a slave to credit, the more profit they make.

Don’t fall for it.

A few weeks ago I decided to start looking into savings accounts properly. For the first time in 5 years, I will soon – I hope – actually have money to save after seriously paying down debt. If I’m totally honest, I was completely at a loss where to turn for advice, so I engaged myself on a rate finding mission. The credit crunch has brought the Bank of England base interest rate to its lowest since records began – yet there are still good products out there if you don’t mind rate chasing after the introductory offers run out. I’m not adverse to doing this, as it’s a small amount of effort for potentially, hundreds of pounds of profit a year.

After weeks of research, I’ve concluded and personally recommend the following:

Instant Access Savings - ING Direct are by far the best provider right now in terms of rates and flexibility. They are offering 3.2% AER (3.16%) on their standard savings account with no limits on access. After the initial 12 month period, the rate drops to an appalling 0.5% which effectively makes it a BoE base rate tracker. However for those initial 12 months, you’ll be doing well with ample time to reassess nearer the end of the introductory offer. Their online interface is amazing, and it makes it nice and simple to sub-divide your ‘account’ into pots for specific things.

One word of caution however: Don’t be fooled by their claim you can have an account open “in about 10 minutes”! It might take 10 minutes to fill in the online paperwork, but it takes many weeks to get it activated and ready for use! Believe it or not, this includes snail-mailing a bank cheque (cheques? I had to order a new cheque book just for this! How antiquated… but worth the effort).

If you’re not keen on ING, or want a better raw rate, consider Egg: They’re offering 3.25% again fixed for the first 12 months but with slightly less ‘zing’ in their interface. Egg are part of the Citigroup of companies.

Regular Savings Account – This is basically a product that gives you an incentive to save every month, usually from £25 to £500 a month. If you don’t make a deposit, then you get penalised for that month. If you’re able to keep it up for the year though, they can pay really well. Right now Halifax are offering 5% and win hands down against the competition.

Cash Mini ISAs – Finally, no savings roundup would be complete without mentioning ISAs. If you don’t have one this year, there is still plenty of time. It’s a tax-free way of saving, and at the moment the best rate seems to be the Barclays Golden ISA, paying 2.58% AER. If you’re new to saving like me, then fill your cash ISA first! It’s tax free and a great way to ensure the government doesn’t start pinching your hard earned pennies. Each ISA can hold £3,600 of cold hard cash, and you get a new one each year.

Most banks are paying around much the same rate at the moment, so to keep things simple check your own bank before moving elsewhere. For the sake of a few percentage points, it’s probably not worth the hassle of transferring any you have right now.

Found better rates? Tell the world in the comments!