It’s never a pleasant moment: That realization that your checking account is overdrawn and your account is getting hit with multiple $35 overdraft fees.
Ultimately, we’re responsible for our own financial missteps – but we all make mistakes. And if you’ve ever felt the sting of a huge overdraft fee for one small error like an overlooked debit card transaction, you know firsthand just how costly those mistakes can be. I’m all for personal responsibility – but I also know that, in too many cases, banks contribute to the problem through policies that actually make customers more likely to overdraw.
Knowing, as they say, is half the battle – which is why I decided to focus this week’s blog on some of the more underhanded ways that banks can set you up for an overdraft.
Here are five tactics banks use to get more overdraft fees out of you – and some helpful tips for sidestepping them:
1. They talk you into overdraft protection. A 2013 report by the Consumer Financial Protection Bureau (CFPB) showed that consumers who agree to a protection program pay significantly more money to their banks than those who don’t.
If you don’t have one of these plans, your transaction could be denied when you try to withdraw funds or make a purchase. If you do have a plan, you’re basically instructing the bank to loan you money when you don’t have enough in your account.
When you have this kind of plan, you’re also much more likely to get hit with multiple fees before you realize you’re overdrawn, making your purchases far more expensive in the long run.
2. They process your biggest-dollar transactions first. We assume that our bank is paying our debt card transactions in the order we make them, but that isn’t necessarily true. Many large banks post the largest transactions first. They could argue that they do that to make sure you have enough money for your large, important transactions like mortgage or car payments, but this system makes you more likely to pay multiple fees.
Say you make two small purchases and one large one today, knowing that you have enough money to at least cover the small ones. If your bank covers the purchases in order, you’ll be hit with one overdraft fee for the last one. But if your bank posts the largest purchase first, you’ll immediately be overdrawn and hit with fees for all three purchases.
3. They hold deposits for clearance. Banks by law can put holds on checks for as long as nine business days for large checks, new accounts or customers who have a history of overdrawing. The bank does have to make at least $200 of a check available to you the next business day, but that rule doesn’t apply if you make your deposit with an ATM.
In any case, when banks take this approach the money you deposit today isn’t necessarily available to help you if you need it within the next day or two.
4. They process payments before deposits. Some banks make a practice out of processing your payments before your deposits.
So on a day when you have five scheduled bill payments and one scheduled direct deposit, your bank could make the bill payments first, bringing your account below zero and triggering overdraft fees. They credit your deposit after they’ve processed multiple overdraft fees.
This approach, combined banks’ practice of making larger payments before the small ones, can really pile on the fees.
5. They base overdrafts on your “available balance” instead of your “actual balance.” This can get a little confusing. Your “actual balance” represents all of the money in your account, including recent deposits. Your “available balance,” on the other hand, is the money in your account, minus holds and deposits that have not been made available yet by the bank.
If your bank charges overdraft fees based on your available balance, you can get stung even if your actual balance never goes below zero.
Learning about these widespread bank practices can be discouraging, but there are steps you can take to protect yourself from overdraft fees:
Keep a cushion of money in your account. Move some money into your checking account, but pretend it isn’t there. Don’t write it in your checkbook or think of it as available. It’s in your account for one reason only: to help protect you from overdrafts.
Balance your checkbook daily. This may sound old-fashioned, but this habit really will help you keep track of your balance and prevent overdraws.
Skip the overdraft protection. Even if you have it now, you can cancel it. Declined transactions are embarrassing, but $35 overdraw fees are even worse.
Link your checking account to a savings account. A number of banks offer this option, but find out if they charge a fee for pulling the money from another account when you need it.
Overdraft fees have become big business for banks, representing 60 percent or more of checking account fee income, the CFPB estimates. It’s always wise to be mindful of the lengths some banks will go to squeeze more charges out of their customers, so you can take steps to keep your money safe.