The Overdraft Protection Racket: Why Banks Want You To Overdraw, And How You Can Get Your Money Back.

By Paul Michael. Last updated 30 March 2009. 34 comments
Photo: betsssssy

I know banks are hurting for money right now, but no more than the rest of us. And one aspect of modern banking that I find most disturbing is how banks allow you to go overdrawn so that they can charge you a hefty fee.

I found this out the hard way recently. I pride myself on keeping a close eye on my bank account. I check it daily, I know what is going in, what is coming out, and I had never been overdrawn until a few weeks ago. An unexpected, and large, bill came out of our account and I didn’t realize it until after I had received the receipt. By that point, it was too late. I was overdrawn, and even though I transferred money immediately to put our account back in good standing, the damage had been done.

Rather than reject any subsequent debits after the bill that put us overdrawn, my bank (Compass Bank) simply let everything go through. Then, they added a $38 overdraft fee to each debit. Is this my fault? Partly, I admit that even though the debit was unexpected, I should have had a bigger buffer in the account.

However, if I had known that the few things I had bought that morning were going to cost me a whopping $38 on top of the price, I wouldn’t have spent the money.

Some of the things I bought that day included:

A tank of gas - $36.65 + $38 NSF fee
Breakfast – $19.99 + $38 NSF fee
Lunch - $8.95 + $38 NSF fee

All of those transactions were electronic. I carry two debit cards, one for my home checking, one for my business. Had I paid with my business checking, there would have been no problem. And if I had been told in any of those situations that the debit was going to cost me $38 extra, I obviously wouldn’t have used the home checking account. Yes, it would have been a little embarrassing to have hard my card declined, but I can handle that compared to the fees that totaled $228 dollars on top of the small items I had bought.

Considering I was only in the red for a few hours, the fees I paid were equal to something like a 4000% interest rate! That makes loan sharks look like Finding Nemo.

In these days of electronic funds transfer, banks know exactly what you have in your account. And it seems there are three options open to our institutions:

1: Simply deny the debit
2: Allow the debit to go through, but require authorization from you, the customer, to proceed and pay the overdraft fee
3: Let the debit go through, say nothing, and ding your account for a whopping fee.

Guess which one our banks have chosen? That’s right, option three. They would rather not tell us about a charge, as most of us would probably not make the purchase. And this is an opt out “service” that almost all banks have on your accounts. You have to inform them that you don’t want this service, but how many of us read the fine print in the pages and pages of legal jargon that you have to sign when you open an account? In some instances, the banks won’t even let you opt out. You have to have the service to have the account. They say it’s for our convenience, but come on, we all know how bastardized that word has become these days.

A recent story on MSNBC highlighted the case of a guy called Clifford Phillips, who used his debit card to pay for a latte. There wasn’t enough money in his account, so his $4 coffee ended up costing him $38 (hmm, I should switch to his bank, their NSF fee is $4 lower than Compass Bank’s). As Herb Weisbaum reported:

Phillips didn’t know his account had this overdraft feature and doesn’t want it. He tells me he prefers “the embarrassment of having the transaction denied” to being socked with a $34 fee. But the bank won’t let him cancel.

“That’s not customer service, that’s exploitation,” he says. “I should have the right to say I don’t want it.”

And this is big business for the banks, too. According to Weisbaum’s article, “Consumers Union figures the nation’s banks collected about $7.8 billion last year in overdraft fees related to debit cards and ATM withdrawals. If they changed the opt-out service to an opt-in service, they would no doubt lose billions in fees. “

So, what can you do if you have been hit with these massive fees? Well, in my case I called Compass Bank and complained. I eventually got two of the six fees debited back to my account. Not good enough for me, but that’s all I was getting.

However, a video I saw recently had the protagonist going one step further. He took the bank to court. And rather than paying a high-priced lawyer to go to court and fight the suit, the bank simply called back and refunded all of the overdraft fees, plus the costs of filing the lawsuit. 

What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

There are also a bunch of great books out there covering this growing consumer problem. Some touch on it, others go in depth. Amazon has the following books that I heartily recommend.

Gotcha Capitalism: How Hidden Fees Rip You Off Every Day-and What You Can Do About It

 

Fight For Your Money: How to Stop Getting Ripped Off and Save a Fortune

 

I Will Teach You To Be Rich

 

1,001 Things They Won't Tell You: An Insider's Guide to Getting the Most Bang for Your Buck

Bottom line is this. Ultimately, it’s your money and you should keep a close eye on it. Don’t go overdrawn. However, these things do happen, and you don’t want to be hit with multiple NSF fees. Instead, opt out of that service and ask your bank about other forms of overdraft protection. Most are based around a credit account that charges you a substantial rate of interest, but it’s much cheaper than $38. If you have the option, link your savings account to your checking account; when you do overdraw, the bank will simply start pulling money from your savings account. A much better, cheaper option, but one that my bank does not offer.

These are hard times. We don’t need extortionate fees at a time when most of us are already feeling the pinch of a tight economy. Stand up to the banks, and fight every fee. 
 

 

 

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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Guest's picture

Excellent post! I just heard Clark Howard talk about this for like an hour straight on his radio show the other day. The majority of banks also let you overdraft at the ATM, even at the bank branch itself. This just seems crazy to me, until I realized how big of money maker it was for them!

This is exactly why i've switched to a smaller credit union and have recently put the majority of my money with ING Direct. I know that ultimately it is the responsibility of the consumer, but there is no reason these banks need to overdraft on purpose to try to make a quick buck!

Guest's picture
Phyllis Steenbergen

I am so disgusted with FEES.I am on disability which isn't very much to live on. I have been hit with fees to the point I am sick. I went in to talk with a bank manager and was told "You can't beat the system, the bank is going to get their money".

I was
trying to figure out when the deposits were made and I got so many different answers, From, After 4:00pm the next business day to 11:59 the next night. I am supposed to have the money available to me the next day, which according to them was 12:00am 24 hours later. Needless to say I was hit with a bunch of overdraft charges.

I have found trying to reason with them is impossible. I have complained to the FDIC several times and it all sums up that we are being legally robbed.

For people on such a low income, any overdraft puts them behind in their bills. I have all of my money allocated to pay bills, but when I pay them, the money is never there, But, I do have plenty of fees to pay.

Guest's picture
guy barbato

... they arrange the overdrafts so that they take the largest debit first, making sure that the 'smaller' overdrafts would also incur the penalty..

in your case; lunch may not have caused your acct to have an overdraft (saving $38) -- but, by charging the gas first, the 'computer program' (cause, lord knows, no person at the bank would be so mean as to charge you money) makes sure that there are the largest number of possible overdrafts!!!

btw, call your bank; and, by that i mean the local bank manager. he/she has the power to credit your acct. no 800-number/online chat person can/will do it for you.

Guest's picture
Amanda

ING denies any charge that is over your balance plus your overdraft credit:

http://home.ingdirect.com/faqs/faqs.asp?s=Overdraft

Guest's picture

I have to say, I don't use overdraft often, and when (once in 5 years) I forget that I wrote a cheque and I get slammed, I get really angry at myself for letting that happen. And then I never do it again.

It's also the reason why I refuse to let automatic debits come out of my account because I can't keep track of all the dates and amounts and I hate leaving buffer $ in my account.

Fabulously Broke in the City

"Just a girl trying to find a balance between being a Shopaholic and a Saver."

Guest's picture
Walt

What do you mean your bank doesn't offer the ability to overdraft from a savings account? I've never heard of that in my life. You really need to switch banks if that's the case.

Guest's picture
mistertamponhead

overdraft from savings? first of all it's savings, not checking... they want you to keep your savings untouched.. you're not suppose to use savings like checking.

DUH!

Guest's picture

Thanks for the great advice!!

I have read a bunch of David Bach's books before but I think I am going to skip this one mainly because I choose not to read anything where the main focus is something negative a.k.a. FIGHT. I am sure it is a great book but life is choices and I choose wisely. =) (Look how well the War on Terrorism is working)

There are some other great book ideas here that I will add to my wishlist though!

Guest's picture
The Economist

There's a catch though with using the overdraft protection. For starters, it's a good 5 points higher than your current interest rate. On top of that, it will be the last thing that's paid off on your card. So that $100 that was used to pay your overdraft will be festering on your card until you pay it off in full.

Just something to keep in mind. They'll get you, it's just a matter of how you like to be got.

Guest's picture
Vince

Playing on the stupidity of the consumer (or on the simple ploy of enacting "rules" which are virtually impossible to be aware of in this incredibly complex "fiscal" environment), banks, like other money-making ("grubbing") institutions are taking full advantage of a scene in which the consumer is NOT seen as a partner/client/fellow citizen, but as a "sucker born each minute". This is a horrible ethic to allow our businesses to hold, let alone enact. But such tactics are a fact, and one can only picture smarmy types sitting around the boardroom table attempting to dream up new ways to fleece the unsuspecting. While one MIGHT find this acceptable in a larger society, where we know some evil must always abide, it's a disaster in a land where fair play has been the clarion call of our social structure since our country's founding.

Certainly, "fair play" is a naive concept. But that doesn't mean it should not be a goal for all of our social structures. I'm not a religious person by any means, but "Love one another," has been JC's primary commandment since he was hitting the trail in old Jerusalem. If we let ourselves get caught up in the "If it's ok for them, it's ok for me" trap, we deserve to go down the tubes. We need to drop the hammer on our banks, and any institution which serves the public in such a critical way. It's one thing to screw people out of their money... it's another to do it and make them think it's their fault, and that they should smile and thank you for doing it. We ALL need to be helping the other guy.... not kicking him when he's down. Talk to your elders about how people helped each other out during the 30's. It was a world that came a lot closer to embracing fairness than what I see now.

Guest's picture
Guest

The other BS things about banks is that they're not lending money to small businesses like they're supposed to. I have a 750 credit score, a strong stable business, and they wouldn't lend me a dime. Thanks Obama....

Guest's picture
Pam Munro

My hubby has gotten good at talking our bank out of frivolous charges for overdrafts - You would think that they would take the items in the order in which they were purchased, but NO. And when the deposits GO IN is also very muddy! And the amazing thing is that if you try to get a straight answer from anyone at the bank about WHAT their policy is, so you can get it figured out, you find that NO ONE KNOWS EXACTLY (or will admit to it) what the policies ARE. One person will tell you you are OK - and then WHAM! Overdraft charges ANYWAY. Remember when banks were solid as a rock and reliable and arithmetically logical? What happened?

As for me, I fight against getting screwed by bureaucracies and other evil entities whenever I can. I have fought off traffic tix which lawyer acquaintances have told me not to bother to pursue - and WON. (To me $50-$100 is still a LOT of $.)And gone after all kinds of consumer complaint issues - with a pretty good batting average.

Try to think legalistically and provide them with scripture and verse of what went on - times/dates/numbers/witnesses - etc.

I also know that medical groups, for one, sometimes just write off some accounts because it's easier/cheaper to pay off than to sue. So, try to settle OUT of COURT and say, you know, I don't really want to pursue this further, can't we come to some agreement? and then ask for the free month's rental or whatever...it works 9 times out of ten, especially if the trade is in a credit for their fees/rental.

Just vent your annoyance elsewhere and in your complaint be cold as ice water!

Guest's picture
lucille

Our bank quit allowing you to tie your savings account to your checking to use as overdraft protection. They of course then jacked the overdraft fee. They do process items in the order they arrive and don't charge you an OD charge if your only in the negative for a portion of the day. They are still rather vague about what will and won't allow you to overdraft. You can't OD at an in network ATM and card swipes that process right away won't. Those that get sent as a batch to the bank at the end of the day still can.

The two things that really have helped prevent piles of overdraft fees are keeping a running check register that we update every time we buy something and not allowing anyone to auto-debit our account.

Guest's picture

Not having a cushion of money to leave or a good enough credit score to get a decent credit card with a bank, I have opted out of using a traditional checking account. I've gotten my pay on a prepaid debit card through my employer for the last few years. I use a money order to pay rent and everything else is easily paid online. Transactions update to the web site much faster than they ever posted to my old bank, so I always know exactly how much money I have.

Once in a great while, I get the dreaded decline at a cash register, but it sure beats the alternative. The card issuer makes money by charging retailers for credit card transactions and for fees on cash withdrawal from an ATM. I don't pay the first and avoid the second by getting cash back at retailers. But who uses cash anymore anyway, right?

Catherine Shaffer's picture

That's not the best part, though. Guess what happens if you receive one of them there bad checks and try to cash it? Yep, you get charged a "returned check fee." So while the sucker on the other end is paying $38 in NSF charges for the single check, the recipient is paying another $38 for "returned check." And then--get this--many banks will submit the check two times in a row, DOUBLING all the fees. There's no reason in the world for a bank to submit the same check twice within one hour except to milk those fees. This happened to me a couple of times with a credit union account. The only reason we kept the account was to get a discount from our auto insurance for using automatic withdrawal. The problem is that statements are issued on the 5th of the month, and the overdraft came out on the 7th. A couple of times, that hypnotized me into thinking there was enough money in the account, and it got overdrawn, and we were charged two $25 overdraft fees. Grr! The last time it happened, I figured this out two days in advance, on the 5th, and I called my auto insurance. There was NOTHING they could do to stop the draft, they said. It was already "in the computer." I called the bank, and there was nothing THEY could do to stop it. The bank was in another town, and I could not drive two hours to make a deposit. My primary bank account comes with a limited number of free wire services, so I tried to wire money to the account. That didn't work, either, for some reason.

Anyway, this gets me very steamed up. That is the number one reason I no longer allow automatic withdrawals for any reason. You completely lose control over your own bank account. Another thing to think about is that when you allow automatic debit on a credit card, you can never cancel it on your end. You have to get the vendor to cancel it, and if there's a conflict, you have to go through a lengthy appeal with your credit card company. You can even cancel the credit card, and that debit will still go through.. I don't know if it works that way with bank debit cards, but it's creepy and I won't have anything to do with it. Someone wants my money, then I have to give it to them. Period.

I use a checking account that automatically opens a margin lending account if you overdraw. There's a reasonable interest rate on the margin account. No overdraft fees.

Catherine Shaffer

Wise Bread Contributor 

Guest's picture
Tim

I was with a major credit union in Arizona. Their policy was that if you had 10 charges that day, but only 1 threw your account into overdraft, all 10 charges would receive an overdraft fee.

When I called them on it, they said it was 'standard practice'.

Guest's picture
Guest

that's what my credit union tried to tell me too, which is a bunch of bull....because then it's like you never even had the money in your account to begin with since it didn't cover one single transaction

Guest's picture
InfoPump

A checking account balance inquiry at the ATM of my credit union shows not your checking account balance, but instead your checking account balance plus your overdraft limit.

So if you have $99.99 in a checking account with a $500.00 overdraft limit when you do an ATM balance inquiry, your balance is shown as $599.99 not the actual checking account balance.

Withdraw $100.00 from your checking account and you'll be subject to fees and interest for tapping your courtesy overdraft protection.

Guest's picture
Guest

He opened his own checking account at Bank of America, you only have to be 14 to have your own checking with them. They call it a "student account". We a kid that has never done banking, he didn't realize that when he went to the gas station to buy a soda that his debit card would work even if there wasn't enough money in the account.

He did this for 3 days, buying stupid little things like candy bars. His NSF fees were over $400.00!!!!!!! I went into the bank with him, talked to the bank manager and said take this stupid overdraft protection off of his account and they wouldn't do it. So I wrote a check to cover the charges (they wouldn't remove any of them) and had to wait a few days for my check to clear. Took my son back into the bank and closed the account immediately--they actually tried to talk us out of it. Went across the street to Wachovia and he opened an account there, where they do offer the same thing, but you can specifically ask that you NOT have that on your account.

Guest's picture

I just had a fight over this with one of my banks recently. I rushed to the bank and put CASH in to cover. I still got zapped for $35. I showed them the online banking statement they generate that showed I covered, but at the bank they whipped out their "statement" whiched showed the "overdraft". So there we argued about their two "BS" accounting schemes-- the one they give their customers and the one they use to fleece people.

It wasn't until I threatened to sue them in small claims court, explaining that we can both show the various statements and let the judge decide which of the two bank generated statements to use, that the manager finally relented. She also give me a parting threat that my account will be marked to never recieve a credit again . . . to which I replied, "I now know how your "BS" game works, and I will never allow you that pleasure again . . . the bulk of my money will reside in one of my other accounts going forward."

Guest's picture
Fina

I enjoyed this post, and am going to call my bank asap to opt out of this service. However, I just wanted to put my two cents in regarding different options for overdraft. The option to have it go to your savings account gives me the willies. If anyone were to get your debit card information and used the card - they would not only have access to all that's in your checking account - but when that was used up, then also all that is in your savings account. And because debit cards don't offer the same "protection" as credit cards do you could be out a lot of money very quickly. Even if you were to recover the funds due to fraudulent charges - with debit cards the practice is that you don't get the money back until *after* the dispute is settled - and who knows how long that would take. And every banks "protection" amounts (I'm not sure what the proper term is - but charges they are willing to cover) are different - and hardly ever open ended.

Guest's picture
Rosa

My partner had a debit/ATM card with the same bank for almost a decade. When he first got it (and when I got my first ATM card, at about the same time) withdrawal requests would just be denied if they were over the amount in the account. A few years later, I switched to a credit union, but he stuck with his big bank for the easy availability of their ATMs.

Last year, he got hit with an overdraft charge for an ATM withdrawal. We contested the fee, they stonewalled, he went in to close the account and all the sudden they could waive the fee. What they claimed not to be able to do was change the ATM setup to deny overdraft withdrawals. So we closed the account anyway.

My credit union has some downsides, but whenever I research the alternatives, they're not just worse, they're downright evil. We need banking reform laws - the laws targeting check cashing/pawn shop/payday loan places should be aimed at the banks, as well.

Guest's picture
Sarah

Despite generally being fairly careful about my banking, I too managed to overdraft my account recently and was hit with 5 fees of $25 for additional debit card uses. I just called my bank to ask why they didn't just pull money from my LINKED savings account (as opposed to the UNLINKED savings account that I also have with them) and they said "we don't do that". Then I asked if they could refund me the overdraft fees and the gal claimed to not see any overdraft on my account (I called from a place where I could not simultaneously look at my account online). Argh.

So, I guess I'm in the market for a new bank, because, despite very rarely needing this service, I find this to be massively annoying!

Guest's picture
Amanda

The banks shouldn't be allowed to get away with this type of stealing!

Guest's picture
Guest

She "overdrafted" even though her view on OUR side showed she was fine; when we went in to complain, they said, well "their" side showed she didn't have enough cash in the account (WTF?).

We told them they were running a shell game and they gave us some cock and bull story about stuff not being taken off, blah, blah blah. But they refunded us 140$

All of her items had appeared except one, so we left 15 bucks in the account and took out the money.

Two days later, we get a bounced check notice and open it. They've overdrafted her AGAIN on stuff that already had hit on the account and we're now in the red $200 bucks again.

Effers. That's almost 500 bucks in a month off of us, despite "our" balance (when you login to the bank) never actually showing an overdraft.

As soon as we get the HELOC paid off, we're going to a different bank.

Guest's picture
Guest

My bank, Compass, tried to use smoke and mirrors to explain to me why two items cause my account to go into the negative and they charge me 5 o/d fees. They first started with that it wasn't really two items it was 3 and then they take their fees out before the ietms actually post. which causes smaller items to o/d which they then hit you again, after all that then they post my deposit which they take all that small check from a part time job in fees. No matter how many times they tried to explain this no time was there a clear answer why they send through the larger items and take their fees which cause more o/d fees instead of posting the smaller items allowing the deposit to go through. These practices are shady at best. I'm closing my account after spending a lot of time with so called "customer service". My humble opinion this not a bank you want to do business with.

Guest's picture
amy

I actually have become savy to the 24 hour period overdraft. i started to bank with a new bank - Key Bank- I deposited in my account a check on saturday in an ATM (because the lines were long in the bank and i had to get my child to school. Apprently at THIS bank they charge you overdraft fees during the day. Becuase I deposited in the ATM the deposit did not hit my account till 8 pm on Monday. I also made an in person deposit on Monday as well which was approximately around 12:00 pm. During the day say at 1 pm and 3 pm checks were cleared through my account. They didn't take into consideration of my pending deposit from Saturday - it didn't post till 8 pm. so at 10 am and 11 am I was charged because my deposit was not in my account at this time. I have never heard of bank that didn't go by the end of the day balance. Like I said I had known about the largest check first for a long time- but this was new to me. Anyone else had this experience???

Guest's picture
Phyllis Steenbergen

I have had this happen to me also. Now it is so bad I am getting collection calls and being threatened with jail time for"Theft by Deception".

I thought my money was available, but they decided to clear my deposit when they wanted to. I am thinking about using all cash, but here where I live, some places won't take cash!! That was a shocker.

Guest's picture
Guest

I recently had $112 in my bank account and after checking my account i had $27 overdraft fees for every purchase i had made that day. I called the bank because the first three that were processed through my account should've went through. The lady then told me that it was withdrawn from my account in the order they were authorized not processed and therefore the money wasn't in my account because it was being held for the ones authorized first. However, the ones authorized first got charged fees as well. After calling the bank back and talking to the bookkeeping department I was told that I had $112 in my account however I had charges totaling $170 and therefore that's why I got charged on every transaction. The only way I had that much charged was with all 6 of my transactions added together. So apparently they like to go by everything done in that day.

So in that case I hope I don't charge several small items in a day and then have an emergency come up for $100 dollars later that day that then overdraws my account and charges for every previous transaction

Guest's picture
Guest

Fees- the unstated dirty word.
I had an instance where I had a gas charge or 10.01 that the cashier accidentally ran 6 times thinking the machine was broken. I couldnt really extra 5 charges that drove me to 5 extra fees. The bank tried to tell me the following day that there was nothing I could do but pay it. Then I went back to the gas station and they said that, that many charges couldn't happen. So I fought with the bank and the gas station with a whole month. Meanwhile my paycheck was consumed in fees which caused all my other auto-pay bills to bounce. After that time the bank manager finally agreed that it was a mistake and said that they were willing to refund half of the fees because they wanted to be fair and would contest the extra charges as a result.
So I only lost about $1800 in banking and other fees since they were doing me a favor. Thank you chase bank!

Guest's picture
Guest

My horror story is as follows. I deposited a $2500 check into my 5/3 checking account and promply wrote two checks for $500 and $1000 but making sure I had the deposit in the bank. I had serveral outstanding checks which I was aware of so I knew the $1000 left along with my checking balance would more than cover all outstanding checks and bank card charges. My mistake. The bank held the check and then sequenced the overdrafts that occured from high to low amounts so instead of $50 in fees for two overdrafts. I was charged for 4 overdraft fees. The two lesser overdrafts were $4.36 and $1.46 respectfully. The bank did pay the checks/bank card transactions because they knew the money was there. They showed documentation of the $2500 being post but in a separate letter on-line they said it was unavailable funds. I like the people but hate the bank's policies.
gleem

Guest's picture
Olympia Mays

Bank of America is THE WORST Bank out there, they prey on the people that are just starting out and are trying to make it but, don't know any better.
B of A did the same to me as they have everyone else. They cashed my checks out of order bouncing all of the little ones. I was sent to collections and told I could not open another bank account.
I did just that, I opened another bank account and immediately put all money in it. I waited about a year, called B of A and told them how disgusting they were and that I would ONLY pay back what I felt I owed them. The amount of the last check they charged me for and the fee, all of the other fees they charged me, they can eat those and have a nice day.
Because it had been so long and already went to collections, they agreed, I paid, and flipped them good bye!!!
This type of practice should be oh so illegal. Loan sharks and Check advance places are wonderful banking options compared to B of A

Guest's picture
Guest

I just had a small issue with Compass Bank, and won't bore you with the details. Time to dump the big banks:

http://moveyourmoneyproject.org/

Guest's picture
Guest

I checked my bank account all day my account had a positive $18.00 in it. I used my card to get $10.00 in gas at 8:00 p.m. at night. I then checked my account when i had got home that evening and it had $8.00 in it everything was fine. I got up the next morning and I was negative in the bank because a $480.00 check went through sometime that same night when it said I was positive for the whole day????????? I know i should keep track better but come on.