Why Banks and Credit Unions Charge Fees
If you’ve ever taken a look at your disclosures from when you opened your account, you may be surprised to know that banking can very often come with some fees. Just like the credit card industry, these fees can be pretty steep and are next on Congress’ hit list if the credit card bill of rights is passed.
So, what kind of fees are you charged and why?
Overdraft Fees
Most people are painfully familiar with overdraft fees. This is the fee that you incur when you spend more money than you have. Many financial institutions will ALLOW your debit card to be approved for transactions, even when you’ve exceeded your account balance. You can, of course, request that they not allow it; however, they will try to talk you out of it. However, if you keep it, then you’re responsible for paying the overdraft fee per item that overdraws your account.
Some financial institutions take the overdraft fees a step further and charge an additional fee for each day you’re overdrawn. For example, Compass Bank charges $36 per overdraft and then $6 a day that you’re negative up to 30 days. In June they will increase days 7-30 up to $7 a day. That’s a lot of money for an overdraft and a very deep hole to get out of if you fall in. However, most other institutions charge $30 per overdraft. While no one likes to pay them, they do come part and parcel with an account.
There are two reasons for the overdraft fee. Number one, it’s a deterrent/training tool. Those of us working in the banking industry spend a lot of time talking to people about balancing a checkbook. By charging a fee for spending more than you have, banks are able to help teach people how to maintain their accounts. With some people it only takes once to get that fee and they are motivated to learn. Some just get mad and blame it on the bank, but that’s another issue. The point is, it does help financial institutions educate their customers.
The second reason is fee income. This is going to come up a lot. Financial institutions, whether for profit or not, have to make income. That’s how they pay their stock/shareholders, give lower rates on loans, and higher interest rates on CDs and savings accounts. More importantly, that’s how it keeps the front doors open. Paying a few fees here and there is nothing compared to the amount of money you could lose if your financial institution went belly up – if you carry more than the standard FDIC or NCUA coverage that is. There is a point where institutions become greedy, and with the trend being that fee income has gone up 41% over the last four years I’m inclined to think we’re getting to that point.
Returned Check Fee
A returned check fee is when you deposit a check from Joe Schmoe and that check is returned to your bank for whatever reason, i.e. insufficient funds, closed account, etc. When that happens, your bank will usually charge you a fee in the neighborhood of $5. Um, excuse me? How exactly is it your fault that the check was bad? How were you supposed to know? And with new privacy laws it’s not like you can call up Joe’s bank and ask to verify funds. The answer is usually no, they can’t. Even if they can, there’s no guarantee that those funds will still be there by the time the check makes its way through the Federal Reserve. So, you’re left holding the bag on a bad check: you’re out the funds from the check and were charged a fee from your bank. Can we tell I don’t like this fee?
Why, you ask, are you being charged? Two words, my friend. FEE INCOME. There is no other reason for this particular fee – though some places may tell you it’s related to processing the returned item. It’s not really a great deal of work to return them, so that’s just an excuse used to appease their customers. In my opinion, this is one portion of fee income financial institutions should forego.
Cashier’s Checks and Official Checks
I get lots of questions about these kinds of checks and the fees that go along with them. First of all, let me take the opportunity to explain these items as most people don’t realize they are actually the same thing. I get a lot of members freaking out because we offer official checks and it’s not the same as a cashier’s check – well, it is. The ONLY difference between the two is that cashier’s checks are guaranteed by an insurance company as opposed to in-house. In either case, the funds are guaranteed. The time it takes to have a check cancelled and reissued in the event it is lost or stolen will vary depending on the financial institution and the insurance company they use – if it’s cashier’s check.
Now, most institutions do not give these out freely to their customers. There are several reasons and I’m sure you’ve guessed one of the big ones – fee income. However, there is more to it than that. First of all, these are checks and they have to be purchased like any other check. Secondly, if they’re insured with an insurance company, there is a fee involved with that as well. So, since this is a convenience item, some of the cost is transferred to the customers purchasing them. The credit union I work for gives one free check a day and then charges $3 for each check thereafter; however most financial institutions charge anywhere from $7-10.
Statement Fees
These fees can be for paper statements on an account that requires electronic statements or simply for those customers who need to have their statement printed every two weeks. Surprisingly enough, this cost isn’t really related to fee income – though it is categorized under that column for accounting purposes. The cost of paper is a pretty hefty expense, so printing out statements for every customer is expensive enough. To alleviate some of that, financial institutions created electronic accounts that are specifically for those who use things like online banking, debit cards, e-statements, online deposits, etc. When someone wants this type of an account with paper statements it costs more money, so financial institutions will usually have a fee for this service. The same holds true for those coming in every couple of weeks wanting to have statements printed out. Most institutions have statements available up to 12 months back for members to view and print online. If they choose to come into the banking center and have it done, there’s usually a fee – though this one is not always enforced.
There are many more fees associated with the banking industry and it really is a matter of reading through your fee disclosure and being aware of what they are. It can be a nasty surprise when you get your monthly statement and are charged something that you never even knew there was a charge for. Other fees you may see include:
- bad address/dormant account
- overdraft protection transfer fee
- stop payment fee
- wire transfer fee
- maximum withdrawals exceeded (some money markets and savings accounts have restrictions)
- business account fees
- change order fees (usually applies to businesses only)
- in-person visit fees (hey! I’ve seen ‘em)
These fees are also a great way to compare accounts with different banks. You may be getting a so-called “free” interest bearing account with XYZ bank, but what does their fee schedule look like? That “free” account could cost you more than you realize if you’re not careful.
What other fees have you been charged or heard of?
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First, Kristy who do you work for the consumer or the banks?
I do not have checks, I only use a debit card, period.
Tell me why I should pay an overdraft fee when the bank instantly knows what I am spending and how much I have in my account. If I do not have the money in my account, then decline the purchase, it is that simple.
For once lets tell the whole truth, banks use everyones money in their accounts to make money 24 hours a day, seven days a week by shuffling money back and forth. Second in todays volatile banking market where stupidity, greed and mismanagement have banks losing BILLONS, why should the consumer pay for their loses.
I will go so far as saying OK charge me for the first overage (my Fault), beyond that it is called extortion and it is premeditated extortion, the banks know exactly what they are doing by approving a purchase with a debit card that does not have the funds. When did mafia banking become legal.
I really would like an answer to this question and I would also like to know where the the government is during all this. Excuse me I know where the government is, sipping dry martinis with bank execs.
@ Dennis – I work for neither a bank nor consumers. I am employed by a credit union and my job is to help consumers by educating them about finances. It’s also the reason I write for this blog.
For the record, I never said that I agree with every thing financial institutions do, let me be perfectly clear about that. I do not think consumers should be charged $30 for something that overdrew their account by pennies. That is excessive in my opinion. However, I do see the other side as well, and I’m simply explaining that side. Banks are a business and they’re in it to make money. Yes, there is a point where their greed can be detrimental – thus the current credit crisis we now find ourselves in – but at the same time there is a measure of personal responsibility on the consumer’s part.
I don’t believe you’ve read my post on the difference between credit versus debit when using your debit card, so allow me to explain that to you here. Your bank has an agreement with Visa or MasterCard (whichever yours is) to allow their logo to go on the bank’s card. This will give you the freedom to use your card anywhere either logo is accepted. So, that means you have a choice. You can use it as debit and enter your four-digit PIN number. Or you can use it as credit and sign for it. When you use it as debit, it transmits through the Star of Nyce network(again, whichever yours is) and is immediately debited from your account. When you use credit and sign for it, the transaction is sent through the Visa or MasterCard network, which means the merchant has to batch their items before it is routed to the banks. If you use your debit card as credit and sign for it, you may have some benefits like reward points; however, the drawback is that it takes a few days to clear the account. This isn’t your bank’s fault. Because it’s routed through the Visa or MasterCard network, your bank doesn’t know how much you’re spending until the merchant batches and Visa or MasterCard sends the file to the bank. So, my suggestion to you is that if you are not keeping a checkbook register to keep track of your transactions, then you should use debit and enter your PIN number so that they clear the account immediately. And since we’re telling the whole truth, if you were keeping a detailed record of your transactions and didn’t spend more money than you had, then you wouldn’t be in the position of paying a fee. I don’t mean to sound harsh, but the reality is that everyone wants to blame the banks. Sometimes it is the bank’s fault, and I’ll be the first to admit that banks aren’t perfect. But, if you’re not financially responsible enough to stop spending when you clearly don’t have the money, you must take some responsibility for that rather than blaming the bank and claiming premeditated extortion.
I don’t know your specific case, and without looking at the account history, I can’t say whether or not the bank was entirely blameless. However, it sounds to me that you’ve been charged several fees in one hit for items that came through. Likely they were small dollar items and you were charged the full $30, or whatever your bank charges, in which case I agree that is excessive. I’ve stated as much before. However, coming from a bank’s perspective, you spent more money than you had – repeatedly – and therefore, they are within their rights to charge you. Now, if you feel that you were not given the full disclosure of those fees and charges, then speak to a manager and see if you can have that resolved. But, I caution you not to lump all financial institutions into this grim view you have of mafia banking when clearly there was some fault of your own as well.
I hope that answers your questions.
[...] can be charged to a checking account. For more details on fees, read a previous post I wrote on why banks and credit unions charge fees. The best way to avoid any fees is to know what they are and don’t do the activities that [...]