Unfair Bank Overdraft Fees

Every year, banks strip $24 billion from checking account holders through overdraft fees.

Unfair Bank Overdrafts

In August of 2010, the Federal Reserve made significant changes to the rules governing how banks handle debit card overdrafts. In an effort to offer more protection to consumers, banks must now obtain permission from their customers before approving purchases or withdrawals which would overdraw their accounts and subject them to a steep overdraft fee.

But despite the new regulations, overdraft fees continue to plague debit card users. And with more than half of Americans now estimated to live from paycheck to paycheck, these unfair fees remain a multibillion dollar revenue stream for the banks.

Studies have shown that in most cases, overdraft penalty fees are disproportionate to the amount of the average overdraft. Conservative calculations put the cost of overdraft fees to American consumers at $38.5 billion in 2011, an increase of $18.6 billion since 2000.
The current average overdraft fee penalty fee is $35. If these fees were considered like a short term, seven day loan, the annual percentage rate would be a whopping 5,000%.


Re-ordering of Transactions

As late as October of 2010, ten of the largest U.S. banks still exercised their right to re-order withdrawals from the highest to the lowest amount, rather than chronologically. Eight of these same banks also reserved the right to post withdrawals before posting deposits. Both of these practices allow the banks to manipulate a customer’s account balance so that they can generate a higher number of overdrafts and thereby, more overdraft penalty fees.

To illustrate this, assume you have a balance of $150 in your checking account. If you made the following purchases and they were posted by your bank chronologically, you would be subject to ONE overdraft fee of $35:

$5 donut and coffee
$60 electric bill
$10 sandwich and drink
$30 gas fill-up
$100 clothing purchase

When banks choose to post your purchases from highest to lowest amount, the purchases above would be reversed. Under this practice, you would now pay FOUR overdraft fees for a total of $140.

There are a few simple things that consumers can do to protect themselves from these unfair and exorbitant fees.

One is to watch your account balance and carefully keep track of your expenditures- purchases, ATM withdrawals, bills that are electronically debited, and checks. Being aware of your balance will help you avoid unnecessary penalty fees.

Consider linking your checking account to a savings account. Again, you will have to be certain that the savings account has enough funds to cover a transaction, but this can also prevent unwanted overdraft fees.