Banking relationships are largely based on trust. People rely on banks to keep accurate records of their transactions, secure their deposits and provide reliable advice. However, there are times when you shouldn't take that trust too far. In fact, there are times when you should completely disregard what your bank says.
Banking is just like any other retail business: Banks are trying to sell you something, and the sales pitches only intensify once you become a customer. Retailers know that repeat customers are a great source of business, and banks in particular know that once they have your attention, it is easier to get you to bite on all kinds of additional products and services.
Sometimes this is helpful. Over time, you may need a variety of banking services, and it can be convenient to do your banking with one company. At other times though, what the bank is pitching is designed to get new fees out of you for products and services you don't really need, or to squeeze fees out of you for services you are already receiving. Those are the pitches you need to resist.
Here are five instances when you shouldn't necessarily listen to your bank.
1. When they offer your a low minimum credit card payment
It may seem like the bank is taking it easy on you when you run up a $5,000 credit card bill and all they ask you to pay this month is $25. The truth is that the bank is trying to stretch out that balance for as long as possible so you will keep paying interest on it. At an average of around 13 percent, credit card rates represent an expensive way to borrow money. If you pay your balance in full every month, you can use credit cards for free, which means you win. But if you continue to carry a balance on your credit cards every month, it means you are continually paying interest and the bank wins. In other words, you win by paying off more of your bill, not less.
2. When they offer to increase your credit limit
A bank may say they are offering you a higher limit on your credit card because you are a valued and trusted customer, but they are really doing it because they want you to borrow more. Keeping your credit limits reasonably tight is a good way to make sure your borrowing doesn't get out of hand.
3. When they offer you overdraft protection
Overdraft protection on checking accounts is another example of something banks pitch as being for your benefit and convenience. What it really amounts to is a very expensive way to borrow small amounts of money. The end-of-year 2012 MoneyRates.com checking account fee survey found that the average overdraft fee was just over $30 per occurrence. Since many overdrafts themselves don't exceed $30, this means you may be paying more than 100 percent just to borrow money for a few days. Opt out of overdraft protection and you could save a lot of money while forcing yourself to develop better banking habits.
4. When they offer you a home equity loan
Home equity loans can be a cost-effective form of borrowing, but too much borrowing can loosen your grip on your home. Second mortgages played a significant role in the housing crisis. The data and analytics firm CoreLogic reports that as of the end of 2012, more than a third of the situations where homeowners owed more than their properties were worth involved second mortgages, and average negative equity in those second-mortgage situations was nearly 78 percent higher than in situations involving only a first mortgage.
5. When they highlight the performance of their investment products
Banks often offer a wide range of investment products, and they tend to highlight the ones that have done well lately. From an investing standpoint, this is why people often jump into a hot product at exactly the wrong time. Focus on how investment products have done over a full market cycle, and take any shorter-term performance with a grain of salt.
To be clear, all of the above are common banking practices, and none of them is disreputable. It's just that they may be more in the bank's interest than in yours. That doesn't mean you can't trust your bank, but it is important to understand the nature of your relationship. That way, you'll know when to pay attention to what they have to say, and when it's better to tune them out.