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Banks are not your friends

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Mark Lennihan/AP

(Read caption) A woman passes a Bank of America office branch, in New York. Bank of America said Jan. 19, 2012, it made $2 billion in the last three months of 2011 from selling its stake in a Chinese bank and selling debt. Hamm argues that reducing your dependence on large financial institutions is important to your financial health.

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I believe that banking institutions are more dangerous to our liberties than standing armies.Thomas Jefferson

 Yesterday, I was stunned to read a news report about how Freddie Mac denied people the ability to refinance, then made investments that earn them more money if people are unable to refinance. “Freddie Mac has invested billions of dollars betting that U.S. homeowners won’t be able to refinance their mortgages at today’s lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom. [...] Millions of homeowners wish they could refinance, but their lenders tell them they can’t qualify for today’s low rates because of tight rules. Freddie Mac is one of the gatekeepers with the power to set those rules, and lately, it has been saying no more often to homeowners.”

In other words, the investment arm of the institution is making investments that will profit if people can’t refinance while their lending arm is telling people that they can’t refinance.

They are not your friends.

Do we even need to go into detail about how banks, insurance companies, and lending institutions consistently work against the customer?

Citigroup’s main brokerage subsidiary, its predecessors or its parent company were considered by the SEC to have violated the law against purposeful or negligent fraud of customers under interstate commerce five times: in 2000, 2005, 2006, 2010 and 2011. In each instance, the firm undertook “never to breach the law again”.

Bank of America, which now includes Merrill Lynch, was found by the SEC to have violated security laws some sixteen times and made similar pledges on each occasion.

JPMorganChase, which now includes Bear Stearns, was found by the SEC to have violated security laws some twelve times and made similar pledges on each occasion.

The scorecard for other big financial institutions is: UBS —seven times; Goldman Sachs —three times; Wachovia —three times; AIG —twice. The list goes on.

These businesses are not out to make your financial lives easier. They are out for profit. Sometimes, profit might be in line with what your financial needs are. At other times, the profit of the bank is opposed to what your financial needs are – and profit will win.

These banks are doing exactly what they were designed to do, which was make money for the shareholders. That does not include making money for you unless doing so happens to coincide with making money for the shareholders.

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My point is simple. Do not rely on these institutions for your financial future. If you already do, make it a serious focus to reduce your reliance on them.

Every day you’re in debt, you’re handing money to these financial institutions because they loaned you some money in the past. If you put $1,000 on a credit card and wait a year to pay it off, you’re not only paying back the $1,000, you’re giving them $200 more for the privilege. Mortgages are even more painful. A 30 year mortgage for $200,000 at, say, 6% often has several thousand in closing costs right off the bat. Then, over the lifetime of that mortgage, you’ll not only pay back the $200,000, you’ll also pay back $231,676.38 more in interest just for the privilege.

Got a credit card? The terms will likely change on that card on a fairly regular basis as the companies find new ways to earn a profit from you holding that card. Often, that means you’re going to be paying fees on it or high interest rates on it or interest that starts accumulating very quickly or bonus programs that are difficult to use.

Every day, I receive emails from readers that have piles of credit card debt, piles of student loan debt, a big mortgage, car loans, and other forms of consumer debt. Others are thinking of getting deeper into debt because they want that house or that car now.

When you walk in the door of a financial institution, you play by their rules. They do not give you money because they want your dreams to come true. They give you money because they’re going to make far more money from you over the long run.

Your mortgage may be life-changing for you, but it’s just another profit-making revenue stream for your bank. The same goes for your car loan or any other debt you may hold.

What’s the solution, then? Debt freedom. It’s a very simple goal, but it’s a powerful one, and until you achieve it, you’re going to be simply handing money to financial institutions.

What’s the biggest part of debt freedom? Self-control. You don’t need everything, and you certainly don’t need it today. Your life will not be made whole or complete by having a big house or a shiny new car. Focus on having just the things you actually need and stand on your own two feet with them.

The best thing you can do if you want better behavior from the banks is to make yourself far less reliant on them and stand on your own two feet financially.

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