This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Tuesday, July 7, 2009

Transaction rearranging for overdraft fees.

Posted By Paul

I read an article that stated how many banks will rearrange the order of transactions as a way to charge you overdraft fees.

Here is a hypothetical example. Say you have $50 in your account and then you use your debit card that day:

8:00 AM $10 Breakfast.
noon $25 at the grocery store.
6PM $50 dinner

So you figure that the 6PM transaction should be considered an overdraft, you feel stupid but oh well it's just one time.

Instead the bank decides to process the transactions for the day in this order:

6PM $50 dinner
noon $25 at the grocery store.
8:00 AM $10 Breakfast.

So now you've overdrawn your account twice, causing you to incur the penalty twice.

If this sort of thing happens over the weekend you can end up with multiple overdraft penalties that easily add up to $100 or more.

You may call this unfair, maybe even think it's the banks setting you up so they can steal more fees from your account, but at the time of this posting this practice is perfectly legal.

My take away from all this? This is all just one more reason to avoid living paycheck to paycheck. The scenario I drew out above becomes a non-issue if you just put a buffer in your checking account to avoid this sort of thing.

Back before online banking was common I knew people that would subtract $100 from their balance in their checking account ledger. That way they always had a $100 buffer in their checking account just in case.

That system or the equivalent is still a great thing to do today. If you find yourself in a place where you are constantly worried about overdrawing your account then you are probably living a paycheck-to-paycheck lifestyle. Overdraft fees are just one more symptom of a problem that comes down to how you handle your money. I would suggest in the short term to make a real effort to build up a checking account buffer (this can be as easy as cutting out Starbucks or Netflix for a while and putting the money towards your checking account).

In the long term, you should look over your financial life and see how you can improve it. Maybe one of my really early posts:

My Financial Philosophy

Is a good place to start.


Mark said...

One thing I do to protect against overdraft fees is to setup a credit card or line of credit with the bank have them pull any overages from that account. It's sometimes treated as a cash withdrawal so interest starts adding up immediately, but still better than an overdraft fee.

Anonymous said...

Bank of America got into trouble for doing this sort of thing a while back with a lawsuit. They were taking money out of accounts before they were applying deposits. I distinctly remember this lawsuit because I was given literature on the subject. What you are talking about is a little bit different - applying payments in whatever order the bank chooses. I'm not sure why a lawsuit has not been brought over this sort of thing as well, but you are right - for now it is legal. Keeping a cushion in your checking account is the best thing to do, along with balancing your checkbook of course!

Save Money to Make Money ?

Don said...

Bank of America has gotten quite aggressive with my account in the past year, and since my employment has scaled back in the past year, I've had to live check to check. I've been very good to keep a register of transaction activities, and I've kept a $50 buffer in my account (which is hard to do) Because my account gets charged a random maintenance fee, or because they delay my direct deposit 2 to 3 days and they re-organize my transaction activity in a one week period, I still end up paying between $300 to $375 dollars per month in overdraft charges. I can usually get a CSR to refund these fees after laying out the activity, explaining that "keep the change" needs to be turned off, and having them reverse the fees for "not having real direct deposit" - the worst part is I have a "do not refund fee" flag on my account, and I have to spend 5 hours finding a supervisor that can look and see the issue. I am meticulous with my budgeting and expenses, but Bank of America will always find a way to charge you fees to put your account under and charge you more fees.

NEVER use the online banking, NEVER autopay your credit card through your account, NEVER user Auto Bill pay thru Bank of America - mind you they pay the bills on time, but they still post the transaction very late, or very early depending on if the account is within fee charging threshold.

Withdrawing and closing your BofA accounts and their ties to the bank may take time, but it is absolutely worth it. Small accounts are better at small local banks or credit unions.