If your bank is getting help from the federal government, then can you really trust it with your own money? With questions circulating about banks' vulnerability to collapse and the safety of customers' savings, many people are wondering whether or not they need to withdraw their cash and stick it in the freezer. Most financial experts say that customers are unlikely to notice any difference between banks that received bailout funds and those that didn't, but that hasn't stopped rumors from spreading about the safest place to keep life savings.
Here is the truth behind five myths about whether or not you need to worry about bailed-out banks. It should make you feel a little more comfortable keeping your cash behind the vaulted walls of your financial institution, even if it received some help from Uncle Sam.
Myth. The most vulnerable banks received funding.
Fact. In many cases, the healthiest banks received funding, because the government was trying to encourage them to start lending again. And when the Treasury first began giving out money last fall, banks didn't have much choice about it; then Treasury Secretary Hank Paulson strongly encouraged banks to take the money, whether they needed it or not.
[For more, read: Credit Card Companies Go on the Defensive.]
Myth. Banks that received bailout funding are more likely to raise fees for customers, because they need to raise cash.
Fact. Many banks, most noticeably through their credit cards, are raising interest rates and fees. Some consumer advocates have questioned if institutions that received taxpayer funds are treating customers unfairly. But most experts say that most banks are raising rates and fees. "You are just as likely to have your interest rate affected whether that bank received bailout money or not. Banks are looking for one thing: Are you a great credit risk? If you are, you are going to receive an increase in your annual percentage rate and decrease in your credit limit almost immediately," says Bill Hardekopf, chief executive of LowCards.com, a consumer resource for credit card information. In some cases, he adds, it doesn't even matter if the customer has become a greater credit risk—the bank may still decide to increase interest rates or cut credit limits.
Banks are competing with one another, so interest rates are driven more by market conditions than a bank's own situation, explains Peter Garuccio of the American Bankers Association. "The prices that matter to consumers are those that relate to the amount of interest they're getting on their deposits and the amount they're paying on their loans. Those are going to be set by market forces, so competition will rule the day there," he says.
The average credit card interest rate is now 14.3 percent, its highest rate since November 2008, according to IndexCreditCards.com, a website that offers credit card news and information.
Myth. If banks need bailout funds, then customers' checking and savings accounts could be vulnerable.
Fact. FDIC deposit insurance, which covers up to $250,000 per customer, applies regardless of whether or not a bank received bailout funds. (The FDIC raised the limits on the amount it insures from $100,000 to $250,000 last fall. The increase applies through the end of 2013.) Just make sure your bank is FDIC insured before trusting it with your money.
[For more, see What the Stress Tests Mean for You.]
Myth. I have nothing to worry about. I'll just keep banking the way I always have.
Fact. While bailed-out banks don't pose particular cause for concern at the moment, the Consumer Federation of America's Steve Brobeck says that could change. "We're concerned that banks that need to raise capital will be more likely to also raise fees and consumer loan rates," he says. Because banks that received government funding are under pressure to cut costs and generate more revenue, they could be tempted to raise fees and aggressively impose them. They may also lower yields on savings account. He recommends that consumers keep a close eye on their banks' policies.
Myth. The extra fees and cuts to my credit limits are driving me crazy, but at least President Obama signed the new credit card legislation, so my rates should go down again.
Fact. Consumers aren't likely to see any changes as a result of the new credit card legislation for at least nine more months—the deadline for implementing most of the new rules. That means that the new limits on raising interest rates and alerting consumers to changes won't go into effect until next spring. Some consumer experts are warning that credit card companies could try to squeeze in rate hikes before then, so card users should be vigilant.