As Consumer Reports summarizes:

Overdraft programs are really high-cost, short-term loans with quadruple-digit APRs. Most banks charge flat overdraft fees. So if your balance goes to zero purchasing even a $1 pack of gum with your debit card could trigger a fee of $35 or more. Once you’ve exceeded your balance, every purchase you make could generate another fee. And, some banks still impose long hold times before you can use the money from checks you deposit, which increases the possibility that you will overdraw your account.

To the extent that you can avoid overdrawing, you should take every precaution to maintain a safety cushion of at least $100 in your checking account. But since that isn’t always possible, there are better options out there for short-term loans if you find yourself in a pinch.

The Wall Street Journal

Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.

Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.

Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.

It’s an important debate and a key lesson in economics. Banks aren’t going to willingly make less money, so if the feds restrict overdraft fees, the affected banks will then kill free checking to make up the difference. But what happens when lenders can’t make it up elsewhere? If, say, there’s a limit on interest rates, lenders will simply stop offering that credit option rather than taking the loss. It’s already happening: Cap interest rates on short-term loans, and the government is effectively taking away the highest-risk consumers’ access to credit.

In an update on the old saying, the road to (financial) hell is paved with good intentions — and unintended consequences.

What’s a housing lottery? In major cities that have large income disparities and limited desirable neighborhoods, the government has set aside a small number of affordable housing options for people who fit strict eligibility requirements (often prioritizing disabled, elderly, or low-income residents). Apartment dwellers pay rent based on a sliding scale — usually one-third of their income — and the housing authority picks up the rest. But because demand far exceeds supply, you can only get in on this deal through a lottery.

The result is known as an economic shortage.

In New Orleans, for example, 4,000 vouchers were awarded among 28,865 applicants, so lots of people walked away empty-handed based on nothing more than bad luck. And in New York, city workers are also included in that priority pool, leading to accusations of nepotism (a common side effect of shortages).

The smart economic solution would be to do away with housing lotteries and let rent prices achieve an equilibrium where the number of willing buyers equals the number of coveted apartments available. It may not be the feel-good solution, but why should getting the apartment of your dreams be a matter of having your name picked out of a hat?

For the most part, the new rules will just stop problems before they start – like cracking down on so-called “universal default,” which previously allowed lenders to raise your interest rates if you were late on an unrelated payment. So if you pay your gas bill late, you don’t have to worry about your Visa interest rate going up (though late payments will still affect your credit score which may change the rates you’re eligible for on your next credit card).

Some of the most visible changes will affect teens and college students. If you’re under 21, you’ll need one of your parents to co-sign your application for a new credit card, for instance. And you’re unlikely to see credit card sales reps offering free t-shirts in the student center – the new rules prohibit banks from soliciting new business within 1000 feet of a college campus.

If you carry a significant balance on your credit card, the new rules could be a big help. Before your bank can raise your interest rate, they’ll need to give you 45 days written notice. And if the increase is big, you now have the option of closing your card and paying off the balance at the current rate.

And for those of you who only make minimum payments, you’re going to reminded monthly of the cost of that mistake. Starting this month, expect to see a “Minimum Payment Explanation” laying out exactly how long it will take to pay off your balance. For example, a mere $2000 on a card with an 18% APR will take 15 years to pay off if you only chip in the minimum each month. We’ve told you this before, but now you’ve got no excuse! From our perspective, this kind of transparency is what gives the consumer power.

Last but not least, watch out for annual fees on cards that used to be free. All these restrictions mean less revenue for lenders, so you can expect them to try and make up for it with annual fees. Unless you are getting some really amazing benefits, it’s probably not worth paying a fee for a credit card. Remember, it always pays to shop around for credit cards, bank accounts, and everything else.

If you’re a small-business owner, you’ll want to pay close attention to today’s column. You may just qualify for one of the following deductions, which could save you major money on your taxes come April 15. Listen up:

1. Buy a heavy truck or SUV. If you haul around a lot of stuff in your line of work, new and pre-owned “heavy” SUVs that are used primarily for business qualify for a depreciation write-off of $25,000 under Section 179 (also known as the Hummer Tax Loophole). SUVs with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds qualify for the full deduction, but the purchase of a lighter SUV, passenger vehicle, or light truck could also net you a smaller write-off.
2. Buy new office equipment (from cows to computers). Section 179 has other juicy benefits for business owners. You can write off up to $250,000 in new property, ranging from computers and software to ostriches and helicopters if that’s what your business entails, and if any of the above have been installed or put to use before December 31.
3. Have your office assets depreciated in value? Because of the 2009 American Recovery and Reinvestment Act, you can also claim an additional 50 percent first-year depreciation bonus on qualifying new equipment and software you bought this year. But note: If you’re also claiming the Section 179 write-off, the bonus only applies on the cost remaining after that deduction.
4. Maximize your health claims before year end. If you are self-employed and pay for your own health insurance, you can itemize your premiums and other medical expenses only if they are in excess of 7.5 percent of your adjusted gross income. But that goes by year, so if you’re close to that threshold but haven’t met it yet, see your doctor now before the cycle starts over on January 1 and you lose that deduction.
5. Evaluate this year’s tax rates and next year’s predictions. If you have freelance income or if your business expenses go on your personal tax return, consider that this year’s personal tax rates are expected to be roughly the same next year. But if you expect to make more money in 2010 and you think taxes will rise, it may make more sense to postpone your deductible expenses until the new year.

All it takes to save major money on your taxes is a little foresight and the ability to spend now before you lose out on these sweet deductions.

Want more visualizations? MightyBargainHunters.com has even more ways to wrap your head around that many zeroes:

• $10 trillion in Lincoln cents would make a solid cube over half a mile on a side. This dwarfs the tallest structures in the world.
• $10 trillion in one-dollar bills taped end to end stretch almost 970 million miles. This is five round-trips to the Sun. It takes light almost an hour and a half to travel this distance.
• $10 trillion accumulates over $1 billion in interest per day at 4%.  It accumulates in four seconds more than the average US worker makes in a year.
• $10 trillion would last Montgomery Brewster over 27,000 years, and you could pay off a hundred Dr. Evils with it.

So why is it important to know just how much a trillion dollars is? Because the U.S. National Debt is currently closing in on $12 trillion. Time to begin work on another penny cube!

We’ve covered before

Under the new law, if you’re under 21, you can’t get a credit card on your own anymore. If you want to get plastic, you need to prove you have a qualifying source of income or a parent, guardian, or of-age spouse willing to cosign for you.

The idea is to cut down on the amount of consumer debt that students accumulate during their time in college. But not everyone ages 18 to 21 is pursuing a degree or wants their parents to meddle in their financial affairs.

If you have parents with bad credit or financial habits, requiring them to cosign means you are letting them determine your credit score. Unscrupulous cosigners could ring up charges under their child’s name and in the eyes of the law, both parties are equally responsible for repaying the loan.

It also means that young people will face a delay before they can begin building their credit history — an essential component of qualifying for an apartment or car loan.

Unfortunately, despite lawmakers’ best intentions, it looks like these regulations will end up penalizing responsible and independent young adults.

A version of the bill passed the House of Representatives last week, but the Senate revision may end up being a little different. The key provisions are expected to pass without much change, so barring any surprises you can expect to see most if not all of the following changes once the legislation takes effect:

• Less tiny print: For starters, you can say goodbye to tiny and unreadable fine print: all disclosures must be in 12-point font or larger. This is such a no-brainer it’s hard to imagine anyone but magnifying glasses manufacturers opposing it.

• No sudden/arbitrary rate increases: When you sign up for a credit card, or any other loan, you expect to know the interest rate you’ll be charged. Recently, however, a lot of credit card customers have been surprised with arbitrary rate increases, even if they never missed a payment. Under the new law, if you are carrying a balance at 10% fixed APR, you’ll know that interest rate won’t change (unless your monthly payment is late, or it’s a promotional rate that expired). And if it does change, you’ll have at least 45 days’ notice, plenty of time to look around for a better card and interest rate.

• High-interest debt automatically paid first: Speaking of interest rates, paying off your highest-interest loans first is always a good idea. It can be hard to actually do that, however, when you have multiple interest rates on one credit card. If you got a cash advance on your card at a high interest rate, and also did a balance transfer at a lower rate, your credit card company can apply your monthly payments to the lower-rate loan. Under the new credit card reform bill, though, high-interest debt will be automatically paid off first, just as personal finance experts have recommended for years.

The bill includes other rules designed to keep teens out of debt, as well as some more technical regulations of the way interest is calculated on existing balances (US News has a good summary of the rest of the changes). Once the Senate finishes its add-ons and amendments, the bill is expected to be voted into law within the next few days.

So what exactly is a counterparty payment?

When one party (such as a bank or a corporation) enters a financial agreement with another party, there is always a certain amount of “counterparty risk,” that is to say that there is a chance the borrower won’t pay their debt or otherwise fulfill their side of the deal.

AIG was in the middle of a LOT of deals on Wall Street and around the world, involving all kinds of financial instruments.  In particular they were insuring a lot of this counterparty risk. So when AIG suddenly ran out of money last year, they took the federal TARP bailout funds they received, and paid their counterparties. In AIG’s case, the counterparties included the world’s biggest banks. AIG ended up paying $12.9 billion to Goldman Sachs, and similar amounts to Bank of America, Merrill Lynch, Germany’s Deutsche Bank AG, and France’s Société Générale.

A (very) simplified example, using three parties, Alex, Bob, and Carl:

Alex wants to borrow $100 from Bob, but Bob is worried that Alex won’t pay him back. So Alex tells Bob to give him some collateral. Bob doesn’t have anything worth $100, but he does have a little money. His friend Carl offers to make him a deal: if Alex goes bankrupt, Carl will pay Bob the $100 he is owed. In exchange, Alex pays Carl a smaller amount, maybe $5.

A month later, Alex loses his job and can’t pay his debt. Alex tells Carl what happened, but Carl admits he doesn’t have the $100 he owes Bob. Carl asks the government for help, and with some new capital from the Treasury, Carl pays Alex (his counter party), Alex pays Bob (all of this with taxpayer dollars).

Now just multiply that scenario by a billion or two, and you’ve got some idea of what’s happening with AIG.