Debit Card Purchases Triggering Overdraft Fees
As we all know, banks charge overdraft fees when an account is overdrawn. I’ve explained the reasoning for this before, why banks charge fees
However, I’ve gotten a lot of questions lately from members who say their other banks are charging them overdraft fees before their purchases have even cleared. I know several banks have been doing that for some time, but to my knowledge, none of the big banks were doing it until earlier this year. Bank of America just started implementing the practice sometime in February, I believe it was.
Before, when a customer chose credit and signed for it, the transaction would take a few days to clear. It works like a credit card in that sense, though the funds are still coming from the checking account. But, that few days clearing time allowed customers to make deposits to cover any outstanding transactions. With the new approach in place, customers who swipe their card and do not have the funds at the time of purchase are being charged then rather than when it clears. Bank of America and others have essentially just taken the float time away.
Consumer advocates are up in arms about it, stating that the banks are simply looking for ways to get additional fees from already strapped consumers. They’re demanding that the Fed intervene and lay down the law about the abuses of overdraft fees. Banks, on the other hand, are defending their position. They claim that this process gives the consumer the most accurate picture of their balances.
That’s true enough, but honestly, that’s a goofy reason to stand behind the practice. My personal opinion is that people shouldn’t be using their cards or writing checks if the money isn’t in the account, period. It’s a bad habit to get into and it causes all sorts of problems. My question to people is always why they didn’t make the deposit first and then use the card. Technically, banks are well within their rights to charge those fees. The customer made a purchase for which there were not sufficient funds to cover it. That is the purpose of the overdraft fee.
I don’t necessarily agree with charging a fee when the transaction hasn’t cleared, though. I think more banks need to allow customers the option to have their transactions declined if it would generate an overdraft fee. Some would jump on the opportunity to do that, while others would not. It is rather embarrassing to have your card declined in public. However, the Fed hasn’t decided one way or the other how they want to handle the abuse of overdraft fees in the banking industry.
It’s a tricky subject. Banks rely heavily on that revenue – $45.6 billion last year – and to take away from that could have negative effects on other areas. The income allows banks and credit unions to operate and provide the free conveniences like online banking and bill pay, the debit card, and things of that nature. Something else I think the Fed should consider is requiring an across-the-board cut in overdraft fees. I think it is ridiculous to charge a customer $35 or more for a $3 item. But, most banks keep pace with the industry standard so everyone is on the same level.
Or, if regulators really want to get on board with stopping the abuse, they need to stop the practice of picking and choosing which order debits post to the account. In my experience, banks will either post largest dollar amount to smallest dollar amount, regardless of which debit came in first, or they will post smallest to largest. The reasoning for the former is that the larger debits are usually car, rent, or other utility payments and those are items that most people would want to go through. But, the smaller items that would have been covered if those had been paid first then accrue several fees as opposed to just one fee if the bank paid the other way around. So, in my opinion, the argument that it’s because people want their larger items taken care of more than the smaller items is simply an excuse, and that’s how they abuse the system. That needs to be corrected.
What do you guys think? Does it bother you that banks charge overdraft fees if there are no funds in the account when the card is swiped? Or, do you think people need to keep better track of their balances?
Related posts:
- Debit Cards Causing Overdraft Fees
- Defeat Overdraft Fees and Debit Card Trickery Using Credit Card Smarts
- Understanding Debit vs. Credit With Your Debit Card
- Why Banks and Credit Unions Charge Fees
- Debit Card Reform: What Are Your Thoughts?
That people swipe their cards knowing there isn’t enough in the account to cover the purchase is the level of damage a person is willing to endure for the goods. They know they’ll be hit with the overdraft fee but do it anyway. They expect it. That they swipe their card NOT knowing is a failure on their part to pay attention to their account. In both cases they likely deserve the charge. BUT, the overdraft fees that REALLY piss me off is the ones the bank “orchestrates” (YES, I said ORCHESTRATES, as in ON PURPOSE just to take money from people who PLAINLY can’t afford it!!!!!) by manipulating the order in which the charges are paid on. My account was in the good by about $35 on Friday, September 12th. During that week from Monday to Friday I had made several small purchases which were still within my account ballance expecting my paycheck to come by Friday so I could cover these charges comfortably, and my regular bills plus a prearranged debit on Monday by T-Mobil. The company I work for was not paid by a very large contractor and in these hard times, the company I work for is cash poor and needed that check to pay us employees. So I didn’t get my check. So I expected that on Monday I would get my check and all would be good. Again I did not get my check and the $100 debit was deducted from my account resulting in a $35 overdraft. This is what I expected by Monday afternoon and accepted would be my fate. What I Did NOT expect is that my bank would hold all of those little charges that I made LAST WEEK, CLEAR BEFORE FRIDAY, until AFTER they got the one charge that would put me over my account ballance in one feld swoop and ran that one FIRST, FIRST MIND YOU, and THEN, FINALLY, on Tuesday of the following week, they had the good conscience to run ALL of the little charges they had been saving clear from last week and managed to run my account into the red by A WHOPPING $275 F**KING DOLLARS!!! NOW, I don’t care WHAT the bank calls it. That is BLATANTLY STEALING!!! It doesn’t cost a THING for the bank to process ALL of those transactions when my account is positive. But let it get ONE CENT low and SUDDENLY, they have to charge $35 to cover WHAT?????? Add to that the UNSCRUPULOUS act OF PURPOSLY manipulating my account just to steal MORE of MY HARD EARNED MONEY from me and THAT”S when I get a PISSED!!!!!!! It’s almost as if the bank is saying… “If a person hasn’t got enough money in their account, then they deserve to get F**CKED! And THAT”S just what we’ll do, because WE can get away with it.” Anyone care to dissagree with me? If you do, just let YOUR bank take $100 or so out of your account this way when you can least afford it and let’s all hear your tune THEN!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Hi Jim,
Thanks for posting. Clearly you’re upset, but I’m going to have to disagree with you. Your bank did not do that on purpose, although you have inspired a post for me where I will address this matter in detail. We can discuss it more fully at the point.
Sure. And It’s always easy to look for someone to blame when the wound is fresh and the pain at it’s highest. To begin with, I had to remember that $100 of that $275 went toward a bill that I already knew I was giong to pay anyway. That brings the overdrafts down to $175. Second, logically I know they don’t have some person sitting in an office waiting for any account to get low enough to review on the prospect that they might be able to pull a stunt like that. It’s all based on policies carried out by computers that the bank put into place long ago and the fact that many transactions simply don’t go through as soon as they’re activated by the customer. In fact, all transactions go through a pending period before they post as complete. So in my more rational mind, I agree with you. It’s just so maddening that it happens the way it does and gives the bank free money out of my account, or anyones. We should have the option of opting out of the “service” of the bank going forward with the payment of transactions when there isn’t enough money in the account to cover it. In fact, I haven’t checked into whether that’s an option or not. The good news is this time when I went in to talk to someone about it, he checked to see if I qualified for overdraft protection, and I DID! I tried this about eight months ago and was turned down because it’s a credit card and my credit was not good enough. But I try hard to pay my bills and apparently I’ve done well, so I have that going for me now. But I can see why the bank likes that. It puts charges on the card that they can charge interest on. And even though one can pay it off before there are charges, the bank knows that most people who get a card will use it and pay on a monthly basis thus paying interest. So again, it’s up to the customer to be responsible with what they have to work with. I will take the lesson and try harder to work with my resources in a way that serves me better. (Gosh, and not a single cuss word. Sorry about that last post.)
I first read this a few days ago and didn’t get a chance to respond. Now I am responding to the comment that Jim has made about his recent happenings. I totally understand what you are talking about with the overdraft fees. I had a friend go through the exact same thing. By the way I work at a local bank. He was telling me that he had enough funds to cover the purchases he made throughout the week, and he wrought a check to his roommate for the rent. He said that the check normally doesn’t clear for a few days, but it went through the next day. He was going to get paid the next day or so. Well to make this short the check came through first, then all of his purchases. The check overdrew his account and then some of purchases came hit his account which had fees attached to them. As a banker I see this all the time. I do see where people say that the purchases they make should come out of there account in the order that they make them. I do agree with that! Unfortunately the system was not set up that way. Something that I always tell my customers when they open accounts is to make sure they keep up there register. That is the most effect tool that you will have when knowing your balance. When you know your balance and you make purchases you should record them so you know what is available to you. If the majority people keep their registers current there wouldn’t be a lot of overdraft problems.
Another thing I wanted to add was about the amounts charged for overdrafts. I have heard people complain about the amount of the fee. I can definitely understand getting charged a $32 or $35 fee because your account is negative 1 cent is absolutely ridiculous. The thing I think people forget is that all banks are business too. They have employees to pay and accounts to add interest to, at the least. Some of these fees are in place for some of the services that some banks offer for free. There are some other things I would like to add but I don’t think it would be relevant to the topic/comment.
In general I think people should keep track of there money. Sometimes there are those instances where you forget to write something down or your check doesn’t come through as planned. In those situations I would call you bank and explain to them nicely (nicely being the key word) what happened and see if they can refund a fee or two, not all of them.
Thanks for reading!!
No question that the NSF fee practices of US banks are abusive to the extreme. Consider:
1) The effective interest on the typically small overdrafts may easily be 1000s of percent. We’ve all heard stories of a $0.30 overdraft triggering a $35 fee. This is a usury. It costs the bank fractions of a penny to lend the customer $3 for a few days.
2) Multiple overdraft fees may be charged in a single day, even though the day’s accounting is all done at a single time at the end of the day.
3) Transactions intentionally ordered from largest to smallest to maximize the number of NSF items.
4) Deposits posting the same day, but later than an overdraft, do not reverse the overdraft condition, even though at the end of the day, the account is not negative.
5) Transactions against insufficient funds are not rejected, even though in this day of electronic payments they easily could, especially days after an account has gone negative. This is akin to letting someone run into an open knife. Customers have no legal right to stop this “convenience feature”.
6) “Creative” accounting practices cause purely technical overdrafts, even if the account is never in the red. Examples: CC authorizations that never post. Overdrafts caused by prior overdrafts. Artificial “cut-off” times (e.g. a transfer from Savings to Checking at an ATM after 5pm is not available in Checking until the next business day!). Overdrafts may be triggered twice by the same transaction, first for the “authorization/hold”, then for the actual “posting” of the item, even though the latter does not change the available account balance. And so on…
7) Abusive fees (say, $10), even if overdraft protection is provided by automatic transfer from a customer’s savings account or similar. In this day, it costs the bank NOTHING to transfer funds automatically between two account.
Consumer protection legislation should be passed that could, for example,
1) cap overdraft fees at a reasonable rate (e.g. max 10% of the overdrawn amount – still an enormous interest rate!)
2) require “end of day” accounting – i.e. prohibit NSF charges for temporary overdraft conditions due merely to the order of posting of transactions, which is often beyond customers’ control.
3) prohibit opaque accounting techniques that cause artificial NSF conditions due to unreasonable “holds”, “cut off times” etc.
4) require banks to offer customers a clear and prominent choice of strict transaction rejection, “convenience” overdrafts, or overdraft protection from other accounts or a credit line.
5) prohibit fees for overdraft protection when funds come from a linked account or a credit line.
Going even further, one could
6) require banks to provide an automatic $250 overdraft line of credit (say, with an 18% or even 25% interest rate) for each checking account UNLESS the customer’s credit profile is so poor that such a line of credit would pose an unreasonable credit risk to the bank.
After all, the current overdraft policies of US banks amount to exactly that: an “implied” credit line whose terms are not at all transparent and that carries an astronomical interest rate. This could be the basis for an usury lawsuit against banks.
I think the argument that “banks are businesses, too” is a bit shallow. Businesses should earn their money fairly, not with deception and abuses – especially when the victims are among the economically weakest part of society. If banks can’t think of fairer ways to make money and can only survive by screwing some of their customers, they deserve to go under.
Strong consumer protection legislation in this area is long overdue, just as it is for credit cards.
I haven’t read the comments yet, but I’ve always considered it my responsibility to make sure money is in my account before I try to use that money in any type of transaction.
Now, that’s not to say I have not set up all kinds of shenanigans with ACHes that I know will not hit until a certain day, doing things like making an ACH payment here against money that isn’t really there yet but will be by the time it is grabbed… I’ve been a little risky with it, but with full knowledge that the error and responsibility is mine if I cut it too close.
Wow, I didn’t know this was an old post. How did I get here? I must have followed a link and a link and another link from that.
@ Jason – Thanks for your insights! I agree that one of the most effective tools is to use a register and I always encourage my customers to do so!
@ Ole – I appreciate your very well thought-out answer and I’d like to address each point specifically and in detail. I can’t really do that in the comments, so I’ll write a follow-up article to this one and use your comments as the springboard.
@ 444 – This is an old post, but a goodie! I’m glad you found it, and I’m glad to read that you take responsibility for your ACHs. We have a lot of members at the credit union that do what you talk about, but always want to blame us for it when something goes wrong. Consumer responsibility is a must.
I had a problem related to this recently, except I never truly overdrafted. A merchant took a hold that wasn’t correct. The transaction never cleared and eventually dropped off but for a period of a couple days, my available balance was negative. My actual balance never dipped below zero. Nevertheless, the bank felt they were right in taking several hundred dollars in overdraft fees. I approached them about it and they agreed with my observations but insisted they were correct in taking the fees.
@ Dude – Hmmm, sounds like you need to switch banks. In my experience, when something like that happens, a bank may ask for you to get a letter from the merchant at most, but either way, they refund the fees. If the transaction never actually took place, they’re shouldn’t have been a fee assessed. I’ve take that up the chain if I were you.
Hi Kristy, I know this article is old but I read it before and it helped alot. You are right, it is our responsibility to record all transactions. My issue, as yours, is the application of credit and debits. My question to you is: between 7/14 & 7/21 my debits did not exceed total credits for that time period, can the bank fudge around the debits and charge fees? Of course the bank told me that I cannot trust the online banking amounts because pending debits can “fall off”. Whatever that means. In closing, can a bank assess overdraft fees if I saw the payment register online? And finally, how can I owe the bank if I have more money than I spent?
Thanks – I think your articles are very insightfull and would like to know if you can recommend a credit union as yours that’s “live”?