Beyond Overdraft Fees: 5 Bank Traps to Avoid (Consumer Action)

Published Sept. 23, 2009 at 4:00 a.m.

Two of the country’s largest banks are overhauling their overdraft programs, touting simpler terms and stronger consumer protections. But the days of the $35 charge on the $3 latte are far from over.

JP Morgan Chase (JPM) announced Wednesday that, beginning in the first quarter of 2010, it will eliminate overdrafts for debit card use, giving customers the option to opt in for the service. The bank will also reduce the maximum number of overdraft fees from six to three per day, and will not charge any fees if an account is overdrawn by $5 or less. Bank of America (BAC) said Tuesday that, starting Oct. 19, it will allow its existing customers to opt out of overdraft coverage. It will also stop charging fees if an account is overdrawn by $10 or less, and will not charge fees on more than four items per day...In June 2010 the bank will introduce an opt-in feature for new customers. (Until then, new customers automatically receive the feature and have to call to opt out.)

The announcements come on the heels of deepening political pressure on the industry to eliminate practices deemed abusive to consumers. After the successful passage of a sweeping credit-card law, in effect February 2010, Congress is turning its attention to other banking practices. Last week, Sen. Chris Dodd (D., Conn.), chairman of the Banking, Housing and Urban Affairs committee, announced that he is working on legislation to curb “excessive” overdraft fees. A similar bill was introduced in the House of Representatives earlier this year by Rep. Carolyn Maloney (D., N.Y.).

The moves by Bank of America and Chase are steps in the right direction, but consumer advocates say that much stronger protections are needed...“They’re modest changes to a draconian program,” says Ed Mierzwinski, the consumer program director for the consumer advocacy U.S. Public Interest Research Groups.

Many of the practices that lead consumers to overdrawing their checking accounts in the first place continue to exist. Here are five.

1...Reordering transactions

Reordering transactions made over the course of a day, so that largest payments clear first, followed by smaller payments, is a common bank practice. It is also one that maximizes overdrafts, Mierzwinski says...Here’s how this works: Say you have $100 in your checking account and you make a $20 purchase, then one for $5 and one for $85. If the banks clears your payments in the order they were received, you’d pay one overdraft fee. But if they clear the $85 payment first, followed by $20 and $5, you’d be charged two overdraft fees.

Starting in the first quarter of 2010, Chase plans to modify payment posting order to reflect ATM withdrawals and debit-card transactions as they occur. But Bank of America is not planning to change the posting order of checks and debits, which is currently from largest to smallest. To avoid this trap, always make sure you have enough cash in your checking account to cover your debit-card payments and outgoing checks.

2...Sustained overdraft fees

Not able to repay the overdraft and fee within a few days? Prepare to pay even more. Over 60% of the largest banks charge so-called “sustained overdraft” fees when consumers are unable to bring their account balances back to $0 or more, according to a study conducted recently by the Consumer Federation of America, an advocacy group...Bank of America started charging a $35 sustained overdraft fee in June. Chase charges between $12.50 and $22.50 after five days...Some banks are even boosting their fees: In August, BB&T started imposing its $30 extra fee after five days, down from seven.

“You need to be aware that you’ve overdrawn your account and then be able to bring it back up quickly or you’ll go even further down into the red,” says Leslie Parrish, a senior researcher at the Center for Responsible Lending, an advocacy group that compiles research on banks’ overdraft policies. Pay back the overdraft fee as soon as possible. It is the only way to avoid getting hit again.

3...Overdraft fees on the rise

Banks may be giving consumers more options when it comes to overdraft fees, but the fees they're charging remain as high as ever. “There will be fewer speed traps, but the fine for speeding is still the same,” says Greg McBride, a senior financial analyst for Bankrate.com.

Fourteen of the 16 largest banks surveyed by CFA charge $35 or more per overdraft, either initially or after a few overdrafts in a year. In the last year alone, almost half of the banks surveyed by CFA have increased their overdraft fees. Citibank upped its fee to $34, from $30; Fifth Third Bank dropped its flat $33 fee and introduced a tiered system with a maximum fee of $37 when customers exceed five overdrafts in a year. In 2006, the Center for Responsible Lending estimated that banks and credit unions brought in $17.5 billion just on overdraft fees...In 2008, that number will easily exceed $20 billion, according to Parrish, who is currently compiling the latest statistics. Want to avoid adding to the bank’s bottom line? Keep track of your account balance and before you make a purchase, make sure you have enough in the bank to pay for it.

4...Plenty of opportunities to slip

Chase and BofA are touting increased consumer control over overdraft, but their protections fall short of typical consumer behavior...Neither bank will charge an overdraft fee if the consumer exceeds their account by $5 or $10 in a day...But the average person who overdrafts their account goes over by $16, according to the Center for Responsible Lending...“If you make one mistake with your debit card that’s small you’ll be OK, but people typically use their debit cards multiple times in a day,” Parrish says.

Topping overdraft fees at three or four a day is equally ineffective, Mierzwinski says...“Four overdrafts a day is $140,” he says...“This product is so wealth-depleting, so harmful, that there should be a limit of four per year, not per day.” One solution is to ask your bank to link your checking account to a savings account. This way, the draft overprotection comes from your own money; plus, the fee is typically smaller—up to $10.

5...The end of free checking?

Just as banks are being forced to reinvent their credit-card business as a result of the new law, they may be forced to do likewise if faced with reduced revenue from overdraft fees. “When fee income is curtailed in any way, that’s going to make banks more dependent on interest spreads – which could ultimately yield less-competitive deposit yields and loan rates for banks that are overly dependent on overdraft and credit-card fee income,” says Greg McBride...One casualty? Free checking accounts. Read more about this soon-to-be extinct perk here.

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