5 Sly Ways Banks Push Your Account Into the Red
By Maryalene LaPonsie
Overdraft fees continue to be big business for banks, despite a 2010 Federal Reserve rule preventing banks from automatically enrolling customers in overdraft programs.
The changes since 2010 include an increase in the median fee that customers pay for withdrawing more from checking than the account holds. They rose to about $30 in 2013 (a record), up from $29 in 2012 and $26 in 2009. This data is based on a survey of nearly 3,000 banks and credit unions by Moebs Services, an economic-research firm in Lake Bluff, Illinois, according to The Wall Street Journal.
Of course, your money mismanagement contributes to all overdraft fees, but banks aren't necessarily looking to help you stay in the black. Instead, some banks have policies designed to push accounts into the red whenever possible. Here are five sneaky ways banks squeeze more overdraft fees from their customers -- followed by what you can do to stop them.
1. Persuading You to Opt for Overdraft Protection
Let's start by talking about that 2010 Federal Reserve rule for a minute. Before its implementation, banks could automatically enroll customers in overdraft protection. Now, they must get customers to opt in. However, it appears some banks aren't being entirely transparent about what customers are getting into when they sign up for overdraft protection. According to a 2014 survey by the Pew Charitable Trusts, more than half of those who had overdrawn accounts didn't realize they had opted into a program that would result in fees.
2. Processing Largest Payments First
Another sneaky tactic is reordering your transactions so the largest items go through first. A representative of the American Bankers Association was quoted in Forbes as saying some banks do this to make sure large, important transactions such as mortgage payments make it through the account. But it seems like a highly convenient way to maximize overdraft fees.
That Pew survey also found that all 12 of the largest banks, in terms of deposit volume, either reordered transactions to run the largest first or reserved the right to do so. However, some banks, such as Citi (C), have since reversed course and are now processing transactions in order from smallest to largest.
3. Running Deposits Last
Along the same lines, some banks may credit deposits after they process payments. That may be true even if you have a deposit being made electronically, such as a payroll direct deposit.
The law requires banks to make direct deposits available the business day after the business day it's received, but there's nothing to stop them from running all your pending transactions and check payments before crediting the deposit.
4. Holding Checks
The Expedited Funds Availability Act allows banks to put holds on checks that could be as long as nine business days depending on whether your account is new, the size of the check and if you have a history of overdrafts.
That said, by law, banks typically must make $200 of a check available to you the next business day. However, that doesn't apply if you make your deposit via an ATM.
Either way, that isn't going to do you much good if you're going to be short more than $200 the next day. For example, if you need to cover $500 for the mortgage payment scheduled to hit your account tomorrow, depositing your $1,000 paycheck today isn't going to help you avoid an overdraft fee.
5. Basing Overdrafts on the Available Balance
This is perhaps the most frustrating sneaky trick banks use. Let's assume your significant other uses the debit card, and you realize that transaction is going to make your account overdrawn once it posts. You gather up some cash and rush to the bank. Your deposit is available immediately, and you deftly sidestep that $35 overdraft fee. Or have you?
Before you start celebrating, know that some banks will charge overdraft fees based upon the available balance, not the actual balance. As a result, your actual balance may never go negative, and the bank could still charge you an overdraft fee because of that pending transaction.
How to Protect Yourself From overdraft fees
Sneaky bank fees can make it hard to keep your account in the black, particularly if you are living paycheck to paycheck. But here are a couple of suggestions to help keep your overdraft fees in check.
- Opt out of overdraft protection. Even if you already opted in, you can change your mind. Opting out means you might have the embarrassment of a declined transaction, but do you really want to pay $35 to save face in front of a store clerk you may never see again?
- Balance your checkbook daily. In the electronic age, balancing the checkbook might seem like a quaint idea. However, there is no better way to track your balance and keep your account out of the red.
- Keep a checking account cushion. Move some of your savings to your checking account to act as a cushion, but don't write that amount in your checkbook or account ledger. Pretend that money isn't there so you aren't tempted to spend it.
- Use a savings account for overdrafts. Some banks and credit unions will let you link your checking account to a savings account. Then, if your checking account goes negative, it will pull from your savings to cover the balance. Some institutions offer this option for free while others charge a fee. However, any fee is typically less than what you would pay for an overdraft.
- Link to a credit card. Likewise, you may be able to link to a credit card to act as a backup to your checking account. However, use extreme caution with this method. If you already have shaky finances, the last thing you need is more credit card debt.