When Jeff Ledford overdrew $10 from his checking account, Bank of America charged him five separate overdraft fees totaling $175. 

That's a 1750% interest for going over $10.  (Jeff is unemployed, by the way.)

Your Bank's Dirty Trick

Jeff got screwed because his bank dealt with his charges out of order, processing the largest transaction first.

This common practice allows banks to deplete your account faster, thus making it easier for them to charge you unnecessary penalties.

This was not a one-time mistake or the stupid policy of a single bank.  This is the industry standard.  No wonder banks are set to make a record $38.5 billion in overdraft fees this year.

Your Accounting vs. Your Bank's Accounting

Most customers expect banks to take out money in chronological order like this:

Date Description Debit Fee Balance
10/1 Smoothies $5.00   $185.00
10/2 Gas Station $29.00   $156.00
10/3 Coffee Cafe $8.00   $148.00
10/4 Electronics $90.00   $ 58.00
10/5 Supermarket $105.00 $35 -$47.00

 

Since the overdraft happens on the last day, you would expect only one overdraft fee.

But that's not how your bank sees it.  They've decided to process the largest transaction first:

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Date Description Debit Fee Balance
10/5 Supermarket $105.00   $85.00
10/4 Electronics $90.00 $35 -$ 5.00
10/2 Gas Station $29.00 $35 -$39.00
10/1 Smoothies $5.00 $35 -$44.00
10/3 Coffee Cafe $8.00 $35 -$52.00

 

Thanks to your bank's creative accounting they can now charge you four extra overdraft fees!

This Could Happen To You

This is a very common practice, reports CBS 13 News which broke this story.

When CBS asked bankers to respond, they justified this as a service they provide to their customers!

Rod Brown with the California Bankers Association says its normal practice for banks to process charges from the largest to smallest.

 

He's quick to point out, there's no law that says they can't. When Kurtis asked him if he could see how the public would think the banking industry is manipulating charges to make the most profit, he said, "No I can't."

 

"Consumer research indicates that those larger transactions are of greater importance to the consumer," Brown said. "It might be a car payment. It might be a mortgage payment." 

 

CBS asked Brown, "Shouldn't I, as a consumer, be able to determine which payments are most important first?"

 

Brown replied, "As a consumer what you can control is the fact you either have money in your account or you don't."

That's not entirely correct.  We also have control over other things.  We can take our money elsewhere, stop bailing out the banking industry, or support legislation that will reform overdraft policies.

I personally agree with CBS that the consumer, and not the banks, should decide which transactions are the most important.

What do you think readers?  Are the banks acting in your best interest with their accounting rules?  Do you have an overdraft horror story? 

If you're not familiar with all the traps your bank has set for you, check out Philip's excellent guide to avoiding unfair banking fees.

(Chart credit: BruinKid of Daily Kos and CBS 13.)