9 Truths About Money That Banks Don’t Want You To Know

Almost 100 years ago, Henry Ford said it was good that most Americans didn't understand how banks work because if they did, there would be a revolution. 

Even though a lot of time has passed, this idea still seems true today as it was in the 1930s. 

This doesn't mean banks are bad; they give us important services and help keep our money safe. 

No one wants to hide their money under a mattress or bury it in the backyard. 

Okay, maybe some might… 

But, the truth is, banks make a lot of money, often at the expense of their customers. 

Banks do things in complicated ways, so some of their tricks stay hidden from the public. 

No matter if you're borrowing money, spending it, or saving it, banks find ways to make money from you. 

The sad thing is, you often don't realize how they're doing it. 

The many ways banks earn money is one reason why bank stocks are popular with investors. 

Now before we start, this is Ivan here from the Vanilla Investor, a former investment analyst and with over $100k invested in the markets. 

My goal is to bring you simple finance at your fingertips. So here are 9 truths about money that banks don't want you to know.

1: Your Money In The Bank Is Not Physical

Even if you have a lot of money in the bank, it's just numbers in a computer. 

Banks use your money for their business—they give out loans for businesses, cars, or houses. 

So, while your money is technically in the bank, it's actually being used elsewhere to make more money for the bank. 

This became very clear in 2008 during the financial crisis. 

People rushed to the banks to withdraw their money, but the banks didn't have enough cash to pay everyone. 

Banks might have some cash on hand, but in a crisis, when everyone wants their money at once, there won't be enough physical cash. 

This is due to a policy called fractional reserve banking, which allows banks to lend out most of the money they have in deposits. 

Does this mean banks aren't safe? 

Not at all.

Your money is protected by insurance, and the government is ready to help if anything goes wrong. 

So, you can feel secure keeping your money in the bank. 

Just remember, having money in the bank isn't like putting money in a box where you can access it at any moment. 

Your money is busy making money, but for the bank, not for you. 

As an individual, you can access your money whenever you want, but if everyone wants their money at the same time, there won't be enough for everyone.

2: Foreign Transaction Fees

Number two: Foreign transaction fees are another way banks make money from customers. 

When you travel outside your home country and use your credit or debit card, you get extra charges that your bank doesn't always tell you about. 

For example, a friend of mine went on a 15-day trip abroad and was surprised when he saw his bank statement after coming back. 

He found $126.08 in foreign transaction fees. 

Banks often don't tell you about these fees because if you knew, you might choose other ways to spend your money. 

Some credit card programs work in certain countries outside the U.S., so if you use their cards in those places, you won't get extra charges. 

But my friend didn't know about this and wasn't part of any such program, so he ended up having to pay those fees.

3: Always Check Your Accounts

Your bank account is very important, so don't be too busy or lazy to look at it often. 

There could be hidden charges you don't know about. 

If you see a charge that isn't yours, tell your bank right away. 

According to an article by CNN, if you report it within 60 days, the bank usually has 10 days to investigate and fix the problem by law. 

Banks might not want you to know this and may try to delay or avoid it, but you have the right to get your money back. 

They have to give you the money back.

4: Bankers Are Not Your Friends

You might think they are because they know your name, call you often, chat with you, and even remember your birthdays and anniversaries. 

But the truth is, they don't really care about you; they're just following a plan. 

A banker friend of mine explained how he builds trust with customers by being friendly and acting like he's on their side. 

Then, he persuades them to take loans they didn't even plan for. 

Imagine getting a $50,000 line of credit you never wanted. 

That's what happens with these fake friendships. 

Bankers are more concerned about meeting their targets set by managers and supervisors. 

If they don't meet these targets, they can lose their jobs. 

My friend told me about colleagues who were fired because they genuinely cared about their clients and didn't push unnecessary loans. 

So, be careful when your banker friend offers you the latest deals. 

Before you sign up for any loan, make sure it's something you really need and want. 

Don't let yourself be emotionally tricked by fake friendships.

5: Banks Earn From Your Card Transactions

Every time you use your credit or debit card, banks earn money through processing fees. 

You might not notice this because you only see the price of what you bought, but the store pays these fees. 

To cover this cost, the store might increase the prices of the things they sell. 

For example, if you buy something for $500 with your card and the store has to pay 3% in fees, that’s $15 that goes to the bank. 

The bank gets this money just for letting you use your card. 

To not lose money, the store might sell the item for $500 when it originally cost $480. 

The extra $20 helps cover the bank's fees. 

Besides, banks also make money from your credit card use. 

That's why they offer so many rewards for you to sign up. 

What you might know is that the interest rates on your card can be increased at any time. 

The average interest rate on a credit card is 17%, but your bank can raise it to 18% or 19% after giving you 15 to 30 days' notice. 

These notices are often filled with legal terms that you might not read carefully, allowing the banks to raise rates without you realizing it. 

If you have compound interest on your credit card, it will keep adding up, making it harder to pay off your debt. 

I’m not saying that credit cards are bad; they make life easier and many people use them every day. 

But it's important to avoid getting into too much debt. 

Always try to pay off your credit card debt every month to stay out of financial trouble.

6: You Are Losing Money Every Year

You've probably heard that a bank is the best place to keep your money, but no one tells you that you're actually losing money each year when you leave it in the bank. 

This isn't about fees or someone stealing your money—it's about inflation. 

Inflation is when the prices of things go up over time. 

This means something you can buy for $100 today will cost more next year and even more in 10 years. 

You might think the money in your account is safe and that its value will stay the same or grow because of interest. 

Everyone wants to keep up with inflation, but this isn't true for most bank accounts. 

On average, inflation in the U.S. is around 3%. 

If your money in the bank earns only 0.05% interest, you're losing about 2.95% of your money's value each year. 

I'm not talking about money invested to make more money, but the money just sitting in your savings or checking account.

7: You Are Being Watched

Banks keep an eye on all your money activities and report anything suspicious to the IRS. 

This helps stop bad things like money laundering. 

If you put in or take out more than ten thousand dollars, the IRS gets told about it. 

If the IRS decides to check your account, they will ask questions about these big transactions. 

They want to know if you paid taxes on the money and if what you did was legal. 

So, always remember that your money actions are being watched.

8: Exchange Rate Markups

This is an extra cost banks add when you use your debit or credit card in another country. 

It's similar to the foreign transaction fees mentioned earlier. 

So, when you buy something in another country's money, it needs to be changed into your home currency. 

There's a standard rate for this set by the foreign exchange market, which changes all the time. 

Banks often add a little extra to this rate. 

This extra amount is like a hidden fee that makes your purchase cost more. 

For example, if the market rate is 1 USD to 0.85 EUR, the bank might use 1 USD to 0.83 EUR and keep the difference. 

These extra charges make your purchases abroad more expensive. 

This can really add up, especially if you travel a lot or make big purchases in another country. 

Banks don't always tell you about these extra charges or the exact rate they're using, so it's hard to know how much you're really paying. 

To avoid high exchange rate markups, you can use cards that don't have these fees. 

Sometimes, using a dedicated currency exchange service can give you better rates than your bank.

9: Dormant Account Fees

Some banks charge fees if you don’t use your account for a while. 

These fees can slowly take away your money without you knowing, making your balance go down. 

The fee amount can be different from bank to bank. 

Some banks charge a fee every month, while others do it once a year. 

Fees can be as small as a few dollars or as big as $20 or more each month. 

If your account stays inactive for a long time, these fees can add up. 

For example, a $10 fee each month would take away $120 in a year. 

If your account doesn't have much money to start with, these fees can quickly use up all the funds. 

Many people don’t notice these fees because they don’t check their account statements regularly. 

This can lead to surprises when they finally check their balance or try to use the account. 

If you have several accounts, you might forget about one, especially if you don’t use it often. 

To avoid these fees, keep your account active by making a small deposit or withdrawal every few months. 

Or you can just set up automatic transfers. 

If you don’t need the account anymore, close it after taking out all your money and making sure with the bank that it’s completely closed to avoid any future fees.

Thank you for reading, cheers!

- Ivan