Real Advice on Avoiding Bank Overdraft Fees
The Real Bank Robbery
Are you tired of being nickle and dimed by your own bank? Financial institutions brag on helping you save while providing safety and security but honestly, if your not keeping up with their constant changes and updates in how they handle your hard earned money, then technically you may be setting yourself up for "legal robbery." As a former employee of two banks with over 6 years banking center and call center experience, I've learned hands on how banks function. I've seen change after change imposed upon both customers and employees. I've concluded, in order to keep customers continually "at fault," banks will continually make changes and attach an overwhelming responsibility of reading the agreement!
In this article, I won't bore you with tips I know you've heard before... balance your checkbook, use online banking, sign up for text alerts, sign up for direct deposit, etc. Your bank tells you that every single day. Employees turn every conversation into offering another "option." Today, banks provide you with many different types of services but mostly all of them come with fees. Contrarily, I am somewhat opposed in taking advantage of the all the bank has to offer and here I'll explain why.
Then vs. Now
If bank services have grown compared to how our grandparents did their banking then shouldn't we be seeing an overall coinciding decrease of overdraft fees charged to customers? We don't. Since we don't see an inverse relationship between bank services and overdraft fees, then it should be more clear how banks make their money! The bigger picture here comes from my experience in dealing with constant changes trickled down from big bank policies tied in with the hundreds of account holders I dealt with every day.
Bank Revenues & Overdraft Fee Costs
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The "Free" Myth
Gone are the days when we needed to carry cash or a checkbook or wait until Monday to make a withdrawal. Because of this, banks have gotten rich making it easier to spend our money with the electronic age. It definitely is costing us with all their various types of fees, but especially painful with overdraft fees. If we're not careful, our accounts can become a playground of monthly maintenance fees, transfer fees, over-the-limit fees, overdraft transfer fees, ATM withdrawal fees, foreign ATM fees, lost bank card fees, yet it happens everyday.
Banks have gotten good at advertising their products as free. But are they really? From checking accounts to online banking, to free bill pay there is always a cost or a catch. My mom has a free checking account but the cost is not being able to use the banking center nor make any teller deposits. She must use the ATM machine, mail in her deposit or sign up for direct deposit. Fair enough? But what if she needed to just cash a check? Or worse, what if the ATM machine was down?
Let's face it, banks and financial institutions are in it for profit, not charity. They have been backed by the Federal Reserve since 1933. Last year alone, banks have made over 31 billion dollars just in overdraft fees! Even with a reported 14% drop in profits from overdrafts after the Financial Reform Act was passed by the U.S. Senate, banks are still making big money. Banks may be profiting less from overdraft fees, but the amount they charge for them have started to go up. The chart up over to the right displays what the average fee was in the last 4 years. Some banks charge well above the average. Bank of America for example, charges 35.00 and Fifth Third Bank will have the highest overdraft fee of them all, at $37.00 each item!
The Misleading Available Balance
How many checks have you written this year? For the majority of account holders, writing a paper check is time consuming and has been pretty much replaced with the safer, faster and cheaper debit check-card. You just swipe, enter your pin number and go. No signature needed. No checkbook to keep up with, right? Wrong. This is probably one of the top reasons over-drafters get themselves into trouble because a running balance still needs to be kept! Part of the problem with choosing to use a debit card is the assumption that because its not a check, a checkbook register isn't required. It just comes right out right? Yes it will, but only if you use it with your pin. Just swiping your debit card without the pin can sometimes take a little longer to clear your account. When the card gets declined because your out of funds isn't the ideal time when to discover something is wrong.
The $1.00 Hold
Let me explain why you still need to keep track of your balance. When you log into your account online, the bank tells you your "available balance." The problem with this balance is 99% of the time it isn't accurate. That is how the banks mislead with their verbiage. To the bank, it is the amount "available" for approving your future transactions with your debit card. But to the account holder, this amount can look higher than what is actually there. Listen carefully. When you use your debit card at a gas station, the amount you pumped usually doesn't get fully subtracted until the merchant submits their receipt to the bank. An "authorization hold" is placed, usually just $1.00, and is deducted simply for the merchant to get a clearance that your account is alive. If you keep up with your balance, then you will truly know what you have and discover that one of your receipts hasn't fully cleared yet.
Account versus Available Balance
Basically, its important for you to realize the big difference between your account balance and the available balance.
Your available balance is simply your current balance or what you see online right now. It includes pending purchases using your debit card and only the available funds from deposits that were placed on hold.
Your account balance is what you have recorded in your checkbook listing all your purchases and deposits. It includes funds that still have yet to clear and ACH purchases that have not shown up yet. Confusing these two balances may cause you to spend more than you actually have so make sure you always base making purchases on your account balance, not your available balance.
2010 Overdraft Changes
Opt In or Out?
Since July of 2010, banks were required to get your permission to either opt in for courtesy overdraft protection or leave yourself opted out. They were no longer able to just allow some of your one time debit card purchases to go through unless you specifically chose to opt in. So what are the main differences of being opted in vs. opted out?
- Opting in basically means that you chose to have an undisclosed amount of leeway to make your purchase without actually having enough funds. Keep in mind this only affects your one time debit card transactions and does not apply to any automatic payments, electronic payments or paper checks. People who wanted to make sure they were opted in were usually concerned with being embarrassed if their card suddenly didn't go through.
- Opting out means that the bank will not authorize any one time debit card transactions if you don't have enough funds. When this change rolled out, a lot of account holders called in to make sure they were opted out because they believed this was the way to prevent overdraft fees. The problem is you can still get overdraft fees even if you were opted out! How?
- If you don't have enough funds and have automatic payments set up, made electronic payments or wrote out any paper checks, these types of payments are not affected by opting out. They can still come through and overdraw you.
- If you've used your debit card at a gas station to pump $20.00 with only $5.00 in your account, the authorization can be approved if the initial pending comes through for only $1.00. Then when the full amount comes through later, you will have overdrawn your account!
Whether you choose to opt in or opt out is entirely up to you. Just be aware that if you have opted out, you can still incur overdraft fees!
How many of you pay all your bills and make store transactions with only one form of payment? In this electronic day and age account holders will likely use a variety of ways to pay for their bills and transactions. Some examples of spending today are:
- A pin-based debit for a store purchase
- A "credit" purchase with your debit card for a Starbucks drive-thru run
- An online scheduled bill payment you set up
- An automatic monthly payment set up with both account & routing numbers
- An electronic check payment made over the phone
- Or simply a written paper check mailed out for your mortgage payment
Regardless of how you choose to spend your money the important question to consider is how does the bank process these incoming transactions and what goes through first.
The Daily Highest to Lowest
This is another reason why it is imperative you keep track of your balance. You may end up with more overdraft fees for purchases you made days ago just now showing up. This is because not all banks have the same priority for processing transactions. Some post debits from lowest to highest, or from highest to lowest. You can ask your bank how they handle posting your transactions or you can check online to see if their terms are listed. They should be disclosed in the agreement you received when you opened the account. It helps to know the pattern because many account holders I spoke to ended up extremely upset expecting to pay only one overdraft fee, but were charged five! Bottom line, the priority we really need to be concerned with is simply keeping track of our balance. Doing that makes how the bank handles your spending become irrelevant and trivial.
Too Many Cut-Off Times
What time is it? Well that's an easy question! Now ask yourself what time is it for the bank? Chances are for certain transactions, its already "tomorrow's business day." This is because banks impose cut-off times for just about everything, from debit card purchases, electronic transactions, ATM withdrawals, ATM deposits, teller deposits, online transfers, wire transfers, etc. Knowing your cut-off times for depositing money is probably the most critical. Its actually more important than keeping up with your own balance! Why? What good does it do if you know exactly what you have in your account but the deposit you made today isn't counted until tomorrow?
ATM Deposits on Friday Night
Most banks observe all of the Federal Holidays during the year and what's important to know is most of them fall on a Monday. So what does this mean for your Friday night ATM deposit? It means your money won't be fully available until Wednesday! So technically you won't have any money over the holiday weekend. Now that doesn't sound very fun! Unless you can wait for your money till the middle of following week, I suggest making your non cash Friday deposit inside the banking center simply because the bank won't process ATM deposits until Tuesday night. Unless you have some "elite" status with your bank, an ATM deposit hold may one day ruin your whole weekend. You may get some of that deposit available to use immediately, usually $100 to $300 dollars but if your a brand new customer, you may not get any available funds at all! Banks evaluate risk with the length of time you've been with them. So watch out for Monday holidays if your making a weekend deposit after the ATM cutoff time because the next processing day isn't until Tuesday evening.
Even if you get to the ATM by the cutoff time, if your average balance is below the amount of the check your depositing, even a regular payroll check or a money order can sometimes be placed on hold for an average of 7 additional days! There are several reasons why the bank may want to hold your check but this is the most common reason. Many times you won't even be aware your bank placed an additional hold until its too late. They normally will snail mail you of the decision in most cases. Some banks will offer waiving those overdraft fees if that's the case, but in the mean time your mortgage, car note and other payments you've made may all be returned unpaid costing you third party fees and a mess on your hands that will likely affect your credit rating with those lenders.
Extended Holds and Your Average Balance
Don't have time to go inside? Teller lines may be long, but another reason you could end up waiting a lot longer for your deposit to clear is if an extended hold is placed. If you go inside and a hold is placed, you can simply ask for a manager to override it or have the teller reverse the deposit to retrieve it back. ATM machines are not capable of giving your deposit back nor can they think "outside the box" to override the hold. Remember, when it comes to the bank, ANY non cash item can be placed on hold, including cashiers checks and money orders! Don't assume they won't because of depositing a same as cash item. Below is a chart for Monday holidays remaining for the year including 2013. Keep this in mind so you know when to avoid making those ATM deposits.
2012 Federal Holidays on Monday
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One of the newest and most convenient ways to bank is definitely being able to use an app on your phone to check your account and even make a deposit! Banks are using technology to impress their account holders all the time. It really is more convenient to deposit over your phone than having to find an ATM. Again, just remember your cutoff times and potential holds for the type of check and amount your sending. A rule of thumb to go by is making sure your money is posted and out of pending status before you spend it!
Bill Pay Services
If your a bill pay user and are one of those types that hate dealing with paying the bills each month and prefer to just schedule it and forget it, listen up. Most banks provide account holders with this service online either free or with a fee. Using a bill pay service can be convenient and saves time. It even allows you to receive your bills directly to the bill payer service, called e-bills. Many mainstream banks and credit unions have this service as part of their online banking.
So what is the issue? First of all, I don't totally agree with this idea of signing up for a "service" to pay my bills. To me it feels like a form of carelessness to simply hand over your money and debts to a third party system to do it for you. Your also providing personal information to the bill payer service as well as trusting it will pay it on time! Why not just pay it DIRECTLY and cut the MIDDLE MAN out? If your going to actually sit down and schedule these payments, the same time could be used to sit down and pay them directly! Here is what I've also learned:
The Bill Pay Way
So how does using Bill Pay relate to overdraft fees? For one, when you set up a Pay To in the bill pay service, most people would assume it will be transmitted electronically. Truth is, there is actually 3 different ways a payment could be sent out to your designated payee:
- a corporate check drawn on the bank's account
- or a personal check drawn from your account.
Yes, a paper check can actually be mailed to your payee! The problem? The bank recommends scheduling these future payments a minimum of 5 days before their actually due to allow enough time for receiving them! That's longer than the 1-2 days processing time for a direct electronic payment! Also, who knows when the company will receive their payment since its being mailed. I received quite a few calls daily on bill pay issues. Most of the time it was about a payment never received or the bill pay coming out on the wrong day. To me it just doesn't make sense to pay your bills this way. Paying them directly where they need to go makes better sense. Think about it this way... would you take a shortcut if you new it would save you gas and time while driving? Why would anyone take the longer route in the first place!
Using e-bills can also have its drawbacks. The action of scheduling it and then just forgetting it can get you into the habit of not even viewing or checking your bills for accuracy. Utility bills, phone and cell phone bills can fluctuate depending on usage. Errors can go unnoticed for quite some time and in the mean time your account is being drained eventually leading to overdraft fees.
I was especially annoyed receiving inbound calls from account holders who had automatic payments coming through and no money. Can you predict the future? If your living pretty frugally then this one is a no brainer. Automatic payments set up with collectors can be especially relentless. Some collection companies will literally run the payment through over and over with seemingly no limits in attempting to collect their payment. In the mean time your being charged overdraft fees for each tried attempt every day! Some banks have daily limits on how many overdraft fees they charge you but it can still be very expensive. If the company isn't able to stop the payment you can call the bank to do it and the only options you have are:
- Paying a stop payment fee with a minimum 24 hour notice (not another fee!)
- Close your account because once you have given your account number out for automatic payments, legally you've given permission to that company to charge your account anytime!
What if your cell phone bill was suddenly higher than usual? Most people don't notice something is wrong until its too late when the automatic payment is already being sent through. Things happen and when they do, its not always outside of a usually required 1-2 day notice with your bank to stop the payment!
One of the many services banks now offer that can impact the perception of what the balance is on your account is text alerts. Just sign in online, enter your email or mobile number and your saved right? Wrong. Although, this is exactly how banks promote this service to help you manage your account. This is another misconception for customers of what your bank will say your balance is. The reason is simple. The odds of the bank knowing what your true balance is to the minute is very rare. As explained earlier, electronic payments and debit card transactions used as a credit can take a day or two to even show up on your account. Receiving text alerts is a great checkpoint to give you an "idea" of how low or high your balance is but using your text message or email alert to provide you your balance is irresponsible.
No Guarantee Terms
The second issue with depending upon alerts is the timing. Banks usually send you an account alert after something has posted. So by the time you get your negative balance notification its already too late. Sometimes the message is flat out old and can cause confusion. Sometimes the alert may not even get sent at all! This is because bank alerts are not guaranteed in case you never knew. When items are in a pending status is the time alerts would be helpful, but most of the time they are sent after transactions post.
Verbiage in Bank of America's Text Alert Agreement:
- "You understand that balances provided may not include recent or pending transactions that have not yet posted to your account and that other restrictions may apply."
- "You agree that we will not be liable for failed, delayed, or misdirected delivery of any information sent through the Service."
Terms for Chase Bank Text Alerts:
- "Account alerts and Chase mobile are provided for your convenience and do not replace your monthly statements, which are the official records of your account. Anytime you review your balance, keep in mind it may not reflect all transactions, including recent card transactions."
- "Delivery of alerts may be delayed for various reasons, including: service outages affecting your phone, wireless or internet provider; technology failures, and system capacity limitations."
The Inescapable Running Balance
What it all boils down to is simply to keep a running balance. How you do this is up to you. Everyone has their own style of managing their own money so be creative! Some prefer the good ol' fashion checkbook register. Some banks provide you with free mini debit card registers that fit right into your pocket! Another way is to save your receipts and then enter them online when you get home. There are many software programs designed to help you not only balance your bank account but provide your overall net worth. In our fast moving digital world where our phones can just about do the talking for us, downloading an app to keep up with our debits and credits makes a ton of sense.
Mobile App to Track your Balance
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Services that Work
- A link to a line of credit for overdraft protection is best because the rate is usually very low. Just be aware that some banks charge a low fee for each delivery of overdraft protection to your checking account. If you link it to your savings, each transfer will count towards a withdrawal from your savings and you may get hit with excess withdrawal fees for going over the limit! Savings accounts don't have unlimited debits as a checking accounts do so I recommend being careful hooking it up to your savings.
- Direct Deposit: A huge time saver and totally reliable. Just don't expect things to clear from an incoming deposit if it isn't the same business day. For example, if you've written a check coming through Thursday and your payroll hits Friday, you will have overdrawn your account. Even if your deposit showed up in a pending status at 11:00 pm Thursday, it will stay pending all day Friday and post Friday night. So the check coming through Thursday will count for Thursday's business day and cause an overdraft fee.
- Text Alerts: When set up correctly, they can quickly bring to your attention items clearing your account that are fraud. Instead of waiting to receive your statement or logging in to check your account, it's a faster way to catch debit or check fraud right in its tracks. Customers just need be aware not to rely on them for preventing overdraft fees.
- Bank services definitely have their advantages and if they work for you, by all means continue using them. I only emphasize the drawbacks in relying on them to tell you your balance. In a perfect world where you don't have to worry about what your balance is on a timely basis, bank services would be advantageous.
The Growth of Banks
The sooner we educate ourselves with banking knowledge, the more we arm ourselves from being legally robbed and the less banks will profit from their account holders. We just need to remind ourselves that if banking is supposed to be easier with more services available, then why are banks profiting more on overdraft fees than ever before? Many of these services can be the culprit of getting us into trouble if we're not careful. On a larger scale, the more banks profit from their account holders, the more capital they gain to buy out banks. With all their gains in capital where does this money go? Mostly into shareholder's pockets and investments. When banks are able to grow and get bigger, the banking industry becomes a little more monopolized. Then in the end, we lose our ability to choose a more competitive bank who will treat us better and not charge so much.
Copyright Lupita Ronquillo (c) 2012
All rights reserved.