In the article, we will fundamentally break down how banks make money. Banks earn their money by lending the money you deposit to other people.
For example, if you deposit $1,000, a Big Bank pays you a small amount in interest to hold on to that money, then turns around and lends it out at a much higher percentage for a home loan.
Assuming that everyone repays their loans in full, the bank makes a huge return on their money for simple arbitrage. But here’s how they really make tons more money.
Traditionally, banks make money from the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make. They also earn money from customer fees and interest on the securities they hold.
How Banks ACTUALLY Make Money – The Truth
FEES, FEES, FEES. In 2017, banks made more than $34 billion from overdraft fees alone. For example, if you’re using a debit card and accidentally buy something for more money than you have in your checking account, you’d expect your bank to decline the charge , right? Nope. They let the transaction go through, and then helpfully charge you around $30 for an overdraft fee. Even worse, banks can charge you multiple overdraft fees in one day, leading to stories of more than $100 in fees levied in horror a single day.
NO MORE OVERDRAFTS
One overdraft fee wipes out your interest for the entire year and makes you hate your bank more than you already do, if that’s even possible. More than half the people I’ve spoken to during my personal finance talks have had at least one overdraft.
One night, I was out for dinner and my friend—let’s call her Elizabeth—started asking me questions about overdrafts. They got increasingly complex, which weirded me out because I wondered how she knew so much about them.
I asked her a simple question: “How many overdrafts have you had?” She got quiet, which of course made me want to to interrogate her more…