Watch Out For These 5 Overdraft Traps
Banks need your money. They're not doing too well on their own, and you're not screwing up enough to generate the fees they need to make their shareholders happy. That's why they've set up sneaky ways to maximize your every mistake—or in some cases, ways to change the rules so that you make new mistakes where you didn't before—in order to penalize you. Here are five things SmartMoney says to watch out for.
1. Authorizing transactions via debit card even if it triggers an overdraft fee
"Debit card use triggers 46% of all overdrafts, according to the Center for Responsible Lending," writes SmartMoney. Keep an eye on your spending and never trust the bank to let you know if you've spent more than you have. As a "courtesy," they'll approve your transaction, then apply a fee.
SmartMoney suggests you ask your bank to set your debit overdraw amount to zero, so that any transaction that would be rejected in the real world will also be rejected by your bank.
2. Reordering transactions to maximize the number of them that can be considered overdrafts
"Banks justify the practice as a way to ensure the most important debits get processed first (say, so a mortgage payment doesn't bounce)." This is utter bullshit. Banks do this for one reason—to generate more revenue in overdraft fees from customers who screw up. Here's an example:
Say you start the day with $100 in your account. You buy a latte ($5), fill up on gas ($50), buy groceries ($35), swing by the drugstore ($8) and then the dry cleaner's ($25). Processed chronologically, only the last transaction triggers an overdraft. Reordered from high to low, however, three purchases do.
SmartMoney suggests two things to protect against this:
- Keep an extra $100 or so as "buffer money" in your account, and never plan on using it.
- Always make sure any deposits have shown up as available funds before you rely on them.
3. Extended overdraft fees
If you take too long to pay an overdraft fee, your bank may attach a second penalty fee. One suggestion is to attach a line of credit or savings account to automatically pay overdaft fees—but don't use the line of credit for anything other than overdraft protection.
4. High daily maximums
Many banks will allow you to generate multiple overdraft transactions in a single day—Chase, for exammple, sets no limit on the number of times they can charge you, and they increase the charges after the first transaction. SmartMoney suggests you negotiate these fees away by pointing out that the trouble stemmed from a single incident, and that the entire unpleasant affair is a rare occurrence for you. (It is rare, isn't it? Otherwise you're just giving money away to the bank.)
5. Taking a day or more to release funds on hold
This last one is triggered by merchants—hotels, gas stations—who place holds on your account before you complete the transaction. Banks, however, apparently have no technology available to release those holds in a timely manner, despite the fact that they're initially placed in mere seconds. If you conduct any business that generates holds on your funds, assume that money is spent until you can confirm it's been released again.
SmartMoney suggests you use a credit card to pay for things that trigger holds—"While it still counts against your available credit, it's more likely that account can withstand a tighter balance for the 24 hours or so it takes for the hold to clear."
Notice a trend here? Most of the suggestions SmartMoney makes to protect yourself amount to little more than socking more money away at the offending bank, or setting up more potential ways for something bad to happen in the form of unexpected fees. If your bank is practicing more than one or two of these bad habits, your best bet is to start looking for another bank or credit union, one that doesn't view you as its own personal ATM machine.
"5 Sneaky Overdraft Traps" [SmartMoney]
(Photo: Getty)
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I got raped by that whole "reordering the way we're going to process your transactions" bit to the sum of 13 $35 OD charges. The bank didn't clear monies I deposited to them before taking out all of the withdraws in whatever order they felt like. Dirty bastards. It's amazing what a weekend can do to you when the bank clears everything on Monday as they see fit.
As for that "Authorizing transactions that trigger OD's" got me in the same incident, even though I had an account linked for OD protections, I still got charged a different fee for using it.
Banks are sneaky people, and it taught me a lesson to watch fund transfers closer.
reading this reminds me of bank of America and all the "fun "that I had with them. Glad I'm with Wamu now.
Or, alternatively, stop using a debit card, and start using a credit card instead. Yes, you have to be disciplined about your spending, but you write one check a month, and you have at least a couple of weeks of lead time.
I'm gonna be banned from the site for this but. I fucked up big time last week.
My rent went in at $1,500, I forgot to transfer funds from savings and just like that I was overdrawn by $900, another $180 in transactions(made before the check was sent) genereated came through in sucession generating 10 overdraft fees. the bank waved all but three of them, but still that's over a $100, ($35 per fee). But I know the banks are the way they are, I've no one to blame but my self...and the dog, damned dog.
Are there banks around that don't use more than one of these tactics? I think they all do.
I try not to use my debit because of the length of time it takes for a transaction to post---it gets confusing.
wormfather, link your checking to your savings, man!
#2 happened to me ...it must have been about 6 years ago, when I was in college. It was my former bank, WAMU. Needless to say I could not afford multiple $35 charges when my weekly paycheck was about $100. When I saw the overdraft charges on my card, I walked into my local branch and asked nicely to have the bs charges reversed. When they refused, claiming the whole thing was my fault, I threw a screaming shit-fit in the middle of their office. I believe I accused them of being criminals, of taking advantage of poor college students, taking advantage of poor people in general, being scammers, etc etc. That worked!
Now I use a cashback credit card for everything. Back then I didn't have a credit card, except one for emergencies.
@ Meg9
Check out your local credit union. They are usually friendlier than the banks while giving better service.
Washington Mutual is really bad about this. I have checked my account on line to see what money was available, and made a withdrawal or purchase. Then magically, another transaction posts in the past prior to other transactions, and puts me over.
This has happened more than once. I even went so far as to take a screen cap of their online banking. Their excuse was that their online banking was not 'official' (HA!) and that I should keep a check register.
Most of the suggestions SmartMoney makes to protect yourself amount to little more than socking more money away at the offending bank, or setting up more potential ways for something bad to happen in the form of unexpected fees.
I don't know. I think "make sure you have enough money that you don't get overdrawn" is not horribly unreasonable advice. Yes, banks have it set up so they can make a ton of money if you overdraw, but but aside from credit card holds - I can see how this might sneak up on someone - you really shouldn't be writing checks or making debits with money you don't actually have.
Which is why I use a rewards credit card for pretty much everything and pay it off in full every month - I get to borrow other people's money for free, don't get overdrawn, and get a small amount back
@loueloui: And a check register does not accurately reflect how they process transactions anymore. I bet if someone showed a bank their check register, the bank would still say the line about largest transaction first...
This just serves as a reminder to myself that I should continue to purchase everything with my credit card and then pay if off. 1 transaction is way easier to keep track of than 30+ a month for myself and the bank.
My local community bank offers an overdraft line of credit. I have a 2K limit, with a low token interest rate. Not only does the bank access the line of credit if needed, they do not charge any fees for doing this.
National City re-ordered transactions on my account and caused me to incur approximately 12 $36 overdraft fees on my account at the beginning of this month. They gave the same BS explanation that they were insuring that the largest transactions were covered first, which is complete and utter bull. What kills me, though, is that they will intentionally then show the date of transactions in your ledger as the dates they cleared rather when they were really made. Instead of making my house payment on time, my car payment on time, and being slightly in the black going into my paycheck that week, I had nothing. My paycheck was smaller covering $432 in overdraft fees, obviously, and National City could have cared less in the process.
To make matters worse, I'm in the middle of a Chapter 7. Fortunately I do have an attorney and I was able to make arrangements on my house and car payments.
I should also add that I was waiting for a $700+ deposit to clear, which they conveniently re-dated to show was made available on Monday.
I work for a bank. I will not keep my money in a bank. When I get paid I go and withdraw all of the funds. Everything is paid for with cash. If I am going to order something off of the internet I put enough cash in the account to cover the transaction. With interest rates on savings accounts the way they are you are better off locking it in a safe at home.
@SkokieGuy: Hell, my Bank of America checking account has a $1000 line of credit. When I first got my, "new! try this!" Visa CheckCard in March, 1999 (granted, it was BankBoston at the time) they attached the $1000 line of credit and explained how it would all work. I've never overdrafted since, because there's an extra $1000 buffer right there on my checking account in case of whatever. (When I started a new job and they direct-deposited my pay into someone else's account, for example, that came in HANDY.)
There is interest on it but since I've never let my checking account sit with a high balance on the credit line for more than 10 days, I've never had to pay more than about twelve cents. And there are no fees or anything.
It's been so easy and effortless for now 9 1/2 years that I'm always boggled people put up with this overdraft nonsense from other banks -- or even from my own.
My mom taught me the $100 buffer trick when I was 11, working a paper route. It has probably saved me a nice stack of change in the past 2+ decades.
Don't use your debit card for anything but an ATM.
Use a credit card:
You don't have to worry about gas/hotel holds.
You can rent a car.
You have purchase protection.
Extended Warranties.
You can reverse the charges.
Rewards, etc.
$100 in buffer money in a checking account would be a great idea....if I ever had more than $100 bucks in my account to begin with.
*sigh*
I've had battle after battle with Wells Fargo about overdraft fees, and have nearly bitten the heads off a fair few unsuspecting bankers in the process. And don't let them fool you with that "overdraft protection" crap. IF you connect your WF checking to your WF credit card and happen to overdraft in your checking, they automatically pull $25 from your credit card as a "cash withdrawl" no matter how much you're over by. Then they charge the credit card $10 for the service. Factoring in the insane interest rate of cash withdrawls on a credit card, you actually end up paying more for overdraft protection than you would on an overdraft fee. Bunk!
I like the buffer. Now that I'm making a little bit more than I used to, I'm trying to keep it in there. I've been overdrafted before and it SUCKS.
got news for you guys - this is only the beginning. "noninterest income" (which is mostly what we all call fees) is the fastest growing segment of banks' balance sheets. since investments & loan portfolios are not performing as strongly as hoped lately, banks will be looking for more ways to help part you from your money. be wary!
I'm 25. When I was in my late teens/early twenties, I constantly overdrew my bank account. Over the years, I probably paid at least $400 in fees. My account hasn't gone into the negative for more than three years now. How did I manage this feat? I know how much money is in my account. I keep track. Once I write a check or swipe my debit card (which, contrary to what many people on this site say, do work for some of us), I consider that money to be gone.
I understand that mistakes can happen. But one way to keep these to a minimum is to keep yourself educated. Know how much of a check gets put on a float hold and for how long. Write everything down. If you write a check, consider it gone even when it hasn't cleared. Maybe, like me, you'll learn that it wasn't the bank's fault, after all.
Does anyone else have their debit card tied to a non-existent credit card associated with the same bank? At my bank, if I overdraft, it will shift the payment to the credit card (which I actually tossed a long time ago) and then I can pay that online without paying anything more ridiculous than a standard APR. Usually I know that I've overdrafted far enough ahead that I can pay off the credit card before any damage is actually done.
like EtoilePB, I've had a $2000 overdraft protection account linked to my Citibank checking for over 7 years now (first as a student and now as a full-time worker). it was free to enroll when I opened the account, and while if I actually overdraft Citi does charge interest on the amount of "Checking Plus" I use, it never adds up to anywhere near $35 by the time I pay it all off. people should ask their banks (yes, even the big evil ones) about overdraft protection accounts and the terms/fees associated, since you may save money if you have an emergency-related overdraft or just need a little "advance" on your checking for a short period.
Citizens Bank charges you $39 in overdraft fees and will hit you up to 3 times within a matter of minutes if you overdraw. I overdrew my account, then deposited more than enough money to cover the fees and negative balance - however, since their hours are so bad, I had to deposit the check to an ATM before work around 8:00 a.m. When they began hitting my account with even more fees when they opened, I flipped out since it said my account balance was in the positive.
Their customer service person told me "oh well if you deposit to an ATM
it can actually take up to FIVE days for us to process that check, why
didn't you deposit to the branch?" Oh, I don't know... maybe because I
have to work to avoid your overdraft fees. Jerks.
Ginger Lennon
Racepoint Group
Phone: 781.487.4640
Glennon@Racepointgroup.com
Follow me on Twitter: Gingie822
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very good advice overall
"5. Taking a day or more to release funds on hold"
i called and complained to my bank about this one specifically yesterday. I noticed that a few times filling up gas, my available balance dropped over $100. I guess the gas stations put a $75 hold on, then you fill up the gas, they drop the hold and charge you actual $$$ for gas. Well the bank charges the charge, and the hold lasts for 24-48 hours still, so if you bought $60 of gas, your account drops $135.
I can also add another 2 to the list that are specific to my bank obviously trying to maximize fees:
6.My online banking setup mails checks out to those vendors that don't take electronic payments. Before the site used to deduct the money from my account when the check was sent out and send a bank check. Now they just write a check against my account on my behalf, so it doesn't show up on my record until the check is cashed. and after the check has been sent by the bank, it falls off the "pending payments" page, so if the check is sitting a while (weeks at times), it comes out of nowhere.
7.Not an overdraft fee generator, but a slimy fee generator nonetheless. Out of network ATM fees went from free for years to $.50 in 2006 to $1.50 in 2007. In 2008 they didn't up the fees, but I'm noticing their atms say "Temporarily out of service" a solid 30% of the time now, which gives no choice but to use an out of network at times.
I understand that mistakes can happen. But one way to keep these to a minimum is to keep yourself educated. Know how much of a check gets put on a float hold and for how long. Write everything down. If you write a check, consider it gone even when it hasn't cleared. Maybe, like me, you'll learn that it wasn't the bank's fault, after all.
Yeah, I see what you did there. There still remain times where the bank has done things in order to generate a profit out of an opportunity that should never have been there to begin with. Taking transactions out of order, claiming they took place at different times in order to justify what they did as in my case, is how I got robbed.
@beckalina: Even if you do consider that money gone when you write a check or use a debit card for a transaction, they will screw you with the reordering.
I had this happen when I was in college. I was getting ill and I had to make a visit to the campus nurse. At the time I did not have a credit card. Anyway, I knew I was going to get nailed with one overdraft fee. No problem. I can handle $30...I'll just transfer that much more from my credit union account into my checking. So I go about my day and made a few other purchases, with the doctor's visit last. Lo and behold, the bank reordered my account and I got nailed for 3 or 4 overdrafts.
There's no way to keep track anymore. My mom told me to write it all down in my checkbook, but what good does that do when the bank takes what I would have written down in chronological order and reorders it to potentially benefit themselves the most?
I messed up online one time and transferred money into the wrong account. Ended up overdrawing my checking account. The worst part was the bank only informed me via snail mail, so I ended up with two more overdrafts before the first letter arrived. I never asked about it, but I'm sure I'd get some line about the "official" letter notification vs "unofficial" phone calls or emails.
My bank had a sign up about getting a second account for use with Paypal and the like. I've been meaning to ask about the overdraw protection on it - not allowing overdraws would be half the reasons for getting one, as far as I'm concerned.
The banks are having to also make up for the lack of monthly service charges. They used to run $3 minimum, and would try to upsell you on the ~$8 package. That was the primary reason I've always used credit unions.
@Wormfather is Wormfather: well, i hope you're not banned from the site (free forum! why so strict?)
either way...
I think the buffer money is definitely necessary, but 100 is probably a bit much. At least 50, because hopefully people check their finances enough to recall what they've purchased in the last couple of days to realize if they should transfer money.
What you can also do is put money into a Savings Account as an "Overdraft Protection" WITHOUT having to pay an overdraft protection. What happens is when you overdraft on your checking, they will transfer money from your savings into your checking account making it a zero balance. You should check with your bank though, because I know some banks do this process for free while other banks will charge you about $1.50.
@facingtraffic: In your case, I agree that what the bank did was shitty. But unless it's an emergency, like your situation . . . The bank reordering transactions wouldn't matter if the sum of all of the transactions was more than zero. My debits rarely ever come out exactly as they're swiped. Some take several days, others take 24 hours.
I'm sorry if what I'm saying isn't coming across the right way. It's just that I had a real problem when I was younger and hate when people find themselves in the same trap. I have a friend that is constantly overdrawn and continually blames the bank for it. 2 times out of 10 it has to do with the things listed in the OP. The other 8 are entirely my friend's fault. I've heard the line, "The check cleared sooner than I thought it would!" More times than I can count. It gets frustrating sometimes.
My favorite bank nonsense would have to be when I make a few SMALL purchases like a sandwich here, and a container of milk there, and then for 2 items I am hit with $70 worth of overdraft charges. There has got to be a better way.
My bank allows the link to the savings account, which is a good thing. I would think that today, with online checking (when it's reliable), it would be easier than ever to avoid overdraft. But things happen.
Bank of America has been getting too many people on the reordering scam as of late. (yes, I know I should not bank there but I have been there for 14 years) They did not get me but they have been a bit aggressive in trying.
I was in there last week trying to deposit my severance from a Fortune 500 company where 10% of the company was laid off. They were going to hold the amount until the 30th and this was the 15th. They told me if I had 10k in the bank they would have released the funds immediately. I did not agree so I opted to wait on the bank manager. While I was waiting the manager got screamed at by three people for the reordering scam.
They finally agreed to release part of it one day and the other part 10 days later. I knew they were trying to get more fees and I certainly did not want to play their game. The manager finally told me she was canceling the transaction and I needed to take the check to chase and cash it. I had to go all the way across town to chase and cash this check then redeposit the cash at Bank of America. Needless to say I'll be leaving BofA as soon as possible.
@facingtraffic: They can't screw you with the reordering unless you overdraft in the first place. That practice may compound the pain from that, but they can't do it if you don't overdraft in the first place. It's just never a good idea to perform debit transactions when you know you're going to overdraft. Better to keep a cushion of money in your checking account if you insist on using a debit card.
I purchased an item from a vendor that is sold by weight. They put thru an authorization on my debt card for $1.00 then put thru an authorization for $600 which was the approximate cost before weighing the item. After weighing the item the total bill was for $602.00 so they put thru a real charge for the $602.00 which cleared in 24 hours. My account still had the $600 authorization pending for 5 days until it would "drop off" - so 5 days I had no access to the $600.
I called the company, they called the debit card company and they had the hold lifted manually/over the phone.
I learned you can request a "hard charge" to be put on your card. This means the company would hard charge the $600 and then hard charge the $2.00 difference and no pending authorization this way to muck up the accounting for other items I had purchased on the card.
This worked at the gas station today also. I put thru the debit card and said hard charge my card for $40 and I pumped exactly $40. Better than doing the "fill up" where they hold $75-$100 of your money and cause overdrafts on your account.
Very good idea to use the CC instead and just pay off each month. I think I'm going to try this. I had a 35 dollar cup of coffee at Starbucks last month because of being 2 dollars overdrawn :(
@tawni: I wouldn't necessarily assume they were "trying to get more fees" just because they placed a lengthy hold on a presumably large check. They were probably just being overly paranoid about getting their money. Yeah, it could create overdraft fees if you didn't pay attention to when the hold was released and spent part of the deposited money...but that would be a separate problem on your part.
I do a couple of things that have stopped overdraft fees dead.
1) I use my debit card as a credit card, particularly on gas-pump purchases (fuck those $100 holds!). My last two banks also offer rewards for using the card this way and I'll be getting 300 bucks in October just for buying shit.
2) Most importantly, I use MS Money because I DO NOT trust the online banking to show the correct "available balance".
I used to be terrible at managing my money, although I almost always got OD fees reversed. Since using MS Money, I never get hit by fees.
Not for everybody,but...
Take a look at ING's "paperless" checking account. I have found that this makes an effective countermove to the other big banks unethical practices.It works like this:
The account pays interest. Nothing to get too excited about,but it beats nothing at all.You have to start an ING savings account (online or snail mail) and link your regular checking account/savings account at your present asshole bank electronically to ING. When you have the "Electric Orange" checking account set up,you can do electronic bill pay,or send paper checks to businesses (ING pays the postage !). You can even schedule your payments for any day for the next year .This can be used to thwart the Chase and B of A practice of changing your due dates to trip you up and generate a late fee.
Okay, "paperless". Everybody asks about that. You do not order checks. All checks are issued by ING from good funds.If you do not have an overdraft line established with ING,you cannot send a check that would bounce. Period. If the money is not in here,they will not issue a check. If you DO have an overdraft line,and the money is not in your account,they will send the check and charge NO FEE. NONE. You will just pay interest on the overdraft for the time that you use the money. (The rate is currently about 9%-very fair).
Now. This takes some getting used to. But, it is a great way to strike back at the pirates at Chase, Bank O'America and the like and still live your life.
I have had a couple of small glitches with ING. They're not perfect. Never forget that they are a monster bank ,too,just based in Holland. Their phone support could use lots of work. But how different is that from other big banks ?
Works well for me. Thought I would share...
@Caslonbold: The annoyance caused by gas station holds was the reason I finally stopped using debit cards altogether and went to credit card only, FWIW.
@JDAC: Totally agree about keeping your own detailed records. I don't trust the "available balance" notation either, as I frequently saw it jump around as authorizations were placed and lifted back when I used a debit card. Although to be fair...that mostly seems to only be a problem for debit card users. The available balance is pretty reliable now that only checks and ACH transactions ever hit my checking account.
Wachovia Practices ALL of these tricks..
They are pretty ruthless about it too..
To make matters worse, when I first started using their bank, I thought I could trust their Online Balance Sheet, like I could with a previous bank.
Amazingly, I could check balances one day, check all of the "holds" and what not, and the very next day, everything was different on the online ledger. the way they record transactions, holds and deposits are soley to make low balance holders slip up.
to make a long story short, My account showed $600 in there, with all of the holds I thought I had. the weekend goes buy with a bunch of small purchases.. Look in the account.. Im over $800 in the hole.. $665 of it was OD Fees to cover small Purchases.
Wachovia was less than Sympathetic with me and "generously" offered to refund 3 of the 19 OD Fees..
Granted, It was my fault, but shelling out 600% interest on a 1 day loan stings a whole bunch.
@Snarkysnake: I like ING, and have accounts with them. But I have to say that I don't really like the way their "good funds" check issuance thing works. I would prefer that it work the way that BoA online banking does, which is that they don't withdraw the money from your account until the recipient of the paper check actually gets it. The big problem with ING's setup is what happens when a check somehow gets lost or the person never deposits it. What happens is that it takes quite awhile (90 days or something) for ING to give you the money back, and you're not earning interest on it the whole time. So that could be a major annoyance if it's a significant amount and not some minor thing you can just cover in the meantime.
So I use their EO account, but only for electronic debits to pay my other bills. I don't use the paper check feature. Maybe some people would like the fact that the transaction is instantly accounted for, if you're not good at keeping track of your funds. But I am, and I keep detailed records separately. So to me it's just a needless annoyance for them to take the money from me before the other party gets it.
Why the heck does anyone use debit cards? They're worse in every way than credit cards.
@readams: I've asked this question many times, and the only conclusion I can come up with is that people simply manage their money in different ways. I personally keep very detailed records and budgets, and don't overspend. Which means that for me, and people like me, credit cards are an obviously better choice (because of all the obvious advantages). But other people seem to simply spend money and figure out how it balances out later. And for that type of person, I could see a credit card being a dangerous tool to use. But I do have to wonder if all these horrendous overdraft charges I hear about do not outweigh the occasional slip-up causing interest charges on a credit card, even if someone isn't perfect about always paying off their credit card bill. Obviously CC's are not a good idea if you're a compulsive spender, but otherwise I think it's a no-brainer to use one.
"suggests you ask your bank to set your debit overdraw amount to zero". Bank of America refused to do this when I asked. They said, it's in the agreement that they can pay it and charge a fee.
@Lunaped: YEAH RIGHT. We have a checking and savings account with Citizen's Bank in NY- You can set up your savings account to be used in the event of overdraft in your checking... good idea, right?
Too bad it costs $15 for EACH OVERDRAFT to use your OWN MONEY. They justify this by saying "It's much cheaper than the $38 you would of been charged."
My husband is a truck driver, and he would use the debit card while I watched the account online and paid bills online or used checks. This system didn't create overdrafts, but got very close at times, so we opened a new account with our credit union. I go every week, deposit his weekly "allowance" and I've already declined signed the paper saying I don't want the bank to authorize charges when the money's not there. It's a great way for him to control his spending out on the road, and I don't have to worry about bill money disappearing.
Our current bank won't allow you to tie a savings account to your checking any longer. They now only allow what they call a "Visa" branded overdraft line of credit for preferred customers (people with over 100,000 at the bank in various accounts).
We keep a second debt card for hotel payments. That keeps them from tripping up our main card. They still need to put a legal mandate on how long someone can hold your money, say 24 hours?