Overdraft fees: Some banks make a customer’s problem worse
All part of generating more than $30 billion or so a year
Let’s say you’ve got a friendly banker and she’s looking out for your interests. Inexplicably, you write three checks — for $50, $50 and $600 — and it turns out you have only $500 in your account when the checks hit the bank. She first processes the two $50 checks, no problem, then, because she has to, pays the $600 rent check but hits you with a $35 overdraft fee.
It might not feel like it, but she just did you a favor —and some banks would handle those three payments differently, in a way guaranteed to slap you with three separate overdrafts, totaling $105. How could that happen?
Easy, under a system known as high-to-low, some banks, presented with multiple items to pay on the same day, and without a specific time stamp, process the biggest one first. In that case, your $600 rent check gets paid and generates an overdraft fee, and then each of the two $50 items is also paid and generates an overdraft fee.
A 2020 analysis by the Center for Responsible Lending reported that, among the top 10 banks, JP Morgan Chase, Bank of America and Capital One use a “high-to-low” system for some but not all types of transactions.
Banks and credit unions collected about $31 billion in annualized overdraft charges through the third quarter of 2020, according to Moebs Services, a financial data firm.
Overdrafts are big money for banks, and they’re also big problems for households struggling to make ends meet. New research from the Harvard Business School found that in lower-income zip codes where a bank was required to stop using the high-to-low ordering system, residents were less likely to turn to costly payday lenders. The researchers found that consumers no longer exposed to high-to-low ordering “experience long-term improvements in overall financial health, and gain access to lower-cost loans in the traditional system.”
Confirming that overdraft fees are important to banks, the researchers found that some banks forced to stop using high-to-low also tended to close branches in the affected zip codes.
If your household is vulnerable to overdrafts, you might want to check if there are better options for you than your current bank or credit union, and if you can qualify for an account.
A few banks don’t charge for overdrafts.
NerdWallet lists overdraft charges at popular banks and credit unions. (A quick search for “NerdWallet overdraft fees banks charge” will get you to the list.) Online banks Chime and Simple don’t levy overdraft fees for certain accounts.
Know your bank’s payment-ordering policy.
A chat with customer service might be fruitless as the payment processing system is down in the weeds. But search your bank website for “checking account fees,” and you should land on an official fee schedule. Scroll down a bit, and you will eventually find the info on how deposits and withdrawals are processed. (Some banks process low-to-high. Nice.)
Opt out of overdraft coverage on your bank debit card.
When you are out shopping, make sure your bank will decline any payment you are trying to make if it will send your account balance below zero. That’s the surest way to avoid overdraft fees when you’re shopping. Log in to your account and check your setting; by law every customer has full control of whether they opt in or opt out of this overdraft coverage.
Check your balance before ATM withdrawals.
Some banks and credit unions will let you withdraw more than you have in the account (up to certain limits) and then levy an overdraft fee.
Review payment dates for automatic bill pay.
While you can opt out of overdraft coverage for “point of sale” transactions, that protection isn’t available for automated payments you have set up. When those transactions go through, if it sends your balance below zero, you will incur overdraft charges. Build in a cushion of a few more days between when your paycheck is typically deposited and when online payments go out. For automated bill payments such as credit cards, first call up the card issuer and ask for your payment date to be shifted to whatever day of the month works for you. Then make the change on your bank account.
And try to keep track of all the automatic annual, or quarterly payments/renewals you have set up for various subscriptions. It’s those infrequent payments that can trip you up and cause overdrafts.
Link an account as your backup.
You can set up another account as your Plan B if your checking account balance hits zero. Money from your linked account will be automatically transferred to avoid the overdraft. Look for a bank or credit union that doesn’t charge for this. Seven of the 10 largest banks surveyed by the Center for Responsible Lending, in fact, generate revenue if you deign to transfer money from yourself, to yourself, to cover an overdraft.