To the surprise of most people, U.S. banks collect $30 Billion annually in overdraft fees. These overdraft fees have ballooned into a national scandal.
“In lending terms, a person who swiped a debit card and overdrew a checking account by $24, and covered it with a deposit three days later would pay a median overdraft fee of $35. That’s the equivalent of loan with an annual rate of 17,000 percent”
According to a USA Today (Oct. 2, 2009) article, banks made $36.7 billion off overdraft fees in 2008. While the economy was collapsing and people loosing their jobs and/or homes, banks were raking in $36+ Billion in “protection fees”. The article notes that some banks allowed debit transactions as low as $1 and charged an overdraft fees.
According to Reuters (August 1, 2014) banks collected $30 Billion in overdraft fees. Banks continued to collected approximately $30 Billion annually after the passing of the Overdraft Protection Act of 2010. Many people are not aware that they have opted-in to be charged these fees when they opened their bank account. Effective July 1, 2010, banks have to ask new customers if they wish to opt in to overdraft protection. That legislation extends to existing customers on August 15, 2010. There is no legislation regarding how much money can be charged for overdraft fees, meaning customers who opt into the program could still pay up to $35 for transactions that take them even $1 into overdraft.
Back in the old days, if you went to an ATM and tried to withdraw a small amount of cash but your account was short, the bank would deny the transaction. Now, more financial institutions will approve the transaction and charge you a fee.
How your bank works against you?
Many banks automatically approve debit card purchases and ATM withdrawals, even if the customer’s account is a few dollars short. For making that “loan” of a few dollars, the banks tack on the fee. A simple warning would give the customer a choice about whether to go through with the transaction and pay the fee.
However, that is not all, banks generally subtract the largest payments first from the day’s transactions regardless of the order the debits came in. If the customer comes up short for the day, this high-to-low ordering increases the number of per-transaction overdraft fees the bank can charge.
Don’t buy a $35 candy bar!
1. Authorization Holds (aka Keeping Your Funds Hostage Fee) – It is the practice of authorizing electronic transactions done with a debit or credit card and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold “falls off.” In the case of debit cards, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1–5 days after the transaction date; in the case of credit cards, holds may last as long as 14 days. For example, when you go to the gas station, unless you specify the exact dollar amount of your gasoline purchase, a hold may be placed on your account (up to $125) to ensure that you have sufficient funds for the gas. When making a hotel reservation it is not uncommon for a hold to be placed on the card. When you check in, a hold may be placed on your card account up to an additional 20% of the room amount. If you are close to your credit limit, it could mean a future purchase is declined. If you used a debit card, it could mean a bounced check and overdrafts fees.
2. Reordering Transactions (aka How the Bank Makes Mo’ Money From You Fee) – When your bank or credit union balances your checking account at the end of each day, how do you think they subtract purchases and payments from your account? Most likely, they subtract the highest dollar amount first, then the next highest, down to the lowest (reordering of transactions). For example, you start your day with a balance of $100 and you make the following purchases in this order: 1) Cup of coffee $5, 2) Gas $40 and 3) Clothing $105. Based on the order of your purchases you should be charged $35 after completing your purchase of your clothing. However, with the reordering practice the total overdraft fee the bank will charge is $105, since the clothing will make the account overdraft and the subsequent purchases will be subject to the “overdraft protection”.
3. Stealth Credit Card Fees (aka Peek-A-Boo Fee) – The Federal Reserve in 2010 prohibited Banks from automatically penalizing Customers for Overdrafts. The Dodd-Frank Law of 2011 decreased the Debit Card fee large Banks were allowed to charge Merchants. This has caused a decrease in revenue for the Banks, so they found a way around the rules through the increase overdraft fees, new annual fees (some of which only kick in when your account is “inactive” — in other words, when you haven’t charged enough). Balance transfer and foreign transaction fees are also on the rise. Balance transfer fees, once 2 percent to 3 percent, are now hitting 4 percent and 5 percent.
4. Exit Fees (aka Hasta La Vista Fee) – So you decide to run away with your money to another “friendlier” bank. Banks now charge an “Adios Fee”. For instance, Bank of America charges $50 if you want to move your IRA to another institution. U.S. Bank levies a $30 fee.
A monthly fee to use your debit card is one thing. A system that manipulates customer account transactions to boost $35 overdraft fees… that’s robbery.
What to do?
There are two things you can do to stop your bank from bleeding your account dry behind your back:
1. Tell your bank or credit union you want to opt out of any system that automatically approves your overdrafts without warning. If they won’t let you, switch banks.
2. If possible, link your checking account to a savings account or line of credit. If you ever get into an overdraft situation, the money will be automatically drawn from there, thus avoiding costly fees. If you pay back the credit line amount quickly, interest charges will be minimal.
3. When paying at the pump, pay cash or set a specific amount.
4. When making hotel reservations, ask their hold policy.