The Federal Reserve has ruled that on August 15, 2010, banks must stop allowing customers to overdraft their checking accounts when using a debit card at an ATM or while making a purchase then charging an overdraft fee on the transaction.
The new rules are good news for the small percentage of bank customers who routinely overdraw their accounts. A Federal Deposit Insurance Corp. study estimates that just 13 percent of depositors - mainly the young, the poor and the perpetually disorganized - pay 93 percent of all overdraft fees.
This means, when you have $2.00 in your account, you cannot buy a $3.00 latte and then get zapped $35 for an overdraft fee. Instead, your card will be declined. For those of you who might not be aware of it - this was a scam by banks for many years - and one of the highest profit making features for the banks.
To top it off, they also had a policy of large to small. Say for instance you had $100 in your account and on that day you forgot about a $99 check that cleared for your car insurance and thus you made a few other purchases.
Here is how you saw it:
On the same day:
$4 at McDonalds - cleared.
$2 at the 99 cent store - cleared.
$10 gas for the car - cleared.
$99 check - oops, overdraft fee of $35.
However, here is how the bank calculated it.
On the same day.
$99 check - cleared.
$10 gas for the car - overdraft fee $35
$4 at McDonald - overdraft fee $35
$2 at 99 cent store - overdraft fee of $35
Thus, you now have a total of $105 in overdraft fees on a total of $115 purchases! Louie the Icepick gives better rates!!
At my bank, they had a marketing awareness campaign about this issue a couple months ago. Though it was worded to make one think you needed overdraft protection, urging you to opt in so as not to lose your important coverage. I read the fine print and opted out!
People with decent credit were often offered free overdraft protection where overdrafts just kicked over automatically into a credit account with normal interest rates. Not everyone was eligible for those however and it was quite possible to get caught in a nightmare cycle with overdraft fees that fed back on themselves and no good way to get out of it if you don’t have the money.
Like a comedian once said:
“If you bounce a check at the bank, we do they charge you a lot more of something they know you don’t have in the first place?”
To play Devil’s Advocate for a minute. What about the 87% who never or very rarely incur overdraft fees. The banks are going to want that income back. From the time I got my first checking account until now, 15 years later, I’ve not once had any kind of fee on it. Are they going to change my account to have a monthly fee? Do I need to worry about how they are going to recoup this money? I suppose they’ll probably start pushing overdraft protection plans to protect the people that don’t keep enough money in their account and don’t want their card being declined.
I understand this, but I would hardly call it a scam. Sure $35 is pretty freaking steep (but don’t forget, if you have $2.00 in your account and go $10,000 overdrawn on one transaction, it’s still $35), but the banks didn’t hide it. I get fee schedule from the bank from time to time and I get a letter any time any of the rates change. I guess I’d call it preying on people who don’t know any better. But when you tell someone over and over and over that if they only have $2.00 in their account and swipe their card for $3.00 you’ll penalize them and then they go out and do it anyways, I don’t think it’s unfair to penalize them, just like you said you would.
I have to say though that I really don’t like the whole cashing checks from highest to lowest thing. At my work, we’ve had tough financial times in the past. Times where, yes, we tried to float checks and it doesn’t always work.
It always drove me nuts to check my bank balance and see three or four $35 dollar fees because they cashed checks from highest to lowest instead of the other way around which wouldn’t incurred just one fee. Worse even if after all those fees I’m still in the black because the deposits covered it, but since they put the deposit in after the withdrawal I was in the red while they were clearing the checks. I mean, they physically had the money in their drawers.
Even though I’ve never, ever paid an overdraft fee (and would be horrified with myself if I were ever so careless as to let such a thing happen), I welcome this as good news.
Recently I went over my balance 3 weeks in a row. One was for 8 cents, one for 4 cents, and one for 11 cents. So for a total of 23 cents the bank had to pay out to cover my purchases, I got charged $105. I don’t mind paying a fee when I go over, but that was ridiculous.
So do all existing accounts convert this way, or do you have to opt-out?
NB: This regulation only applies to debit cards. It does not make OD fees obsolete and you will still get one if a check in excess of your balance is cashed.
Wells Fargo would routinely do exactly what DMark describes, intentionally running the largest transaction first in order to create overdraft situations in which massive charges could be levied against a larger number of smaller transactions. 4% of their customers were paying 40% of the bank’s overdraft fees because of this shit.
“Internal bank memos and e-mails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole, motive was to maximize the number of overdrafts,” Alsup wrote. (Alsup being the US District Judge in the case)
You do know, of course, that you could have told them you wanted to opt-out at any time in the past? It wasn’t a requirement that you have this coverage. The only difference between then and now is that previously everyone had the coverage and had to opt-out if they didn’t want it; now you have to sign up if you do want it.
As well, it’s not only debit transactions. It also refers to non-reoccurring transactions.
The fees sound high until you realize, the banks can charge what they want. There are no rules determining how much they charge. If they decide to jack it up to $50 or$100, they can. A few years ago we would have screamed at 35 bucks. But they slowly lobster us. turning the heat up slowly so we are not aware of it until we are boiling.
I have tried opting out at my last 3 banks. They ALL told me I was not allowed to because it was company policy to have overdraft protection of some kind on EVERY checking and saving account. They said my only option was to apply for an overdraft line of credit (which I couldn’t get approved for).
One banker told me it was their policy to save their customers from the embarrassment of being declined. :rolleyes:
The first time they told me this, I assumed they were lying to me and I left the bank. The second time, I thought that since 2 different banks said the same thing, it must be true. I had to change banks again when I moved and the 3rd said it so I just gave up trying.
That means people better check their balance carefully before going out to eat or shop.
Something they should be doing already.
A declined card could cause embarrassment or worse at a restaurant.
This California lady was arrested because she couldn’t pay her restaurant bill and was acting strangely.
The police impounded her car. She left the station with no car, phone or money. They found her body last week.
A extreme example. But restaurants can get pretty nasty if your card is declined and you aren’t carrying cash.
Hmm. I just checked my bank… I have to explicitly apply for credit when applying for a formal overdraft capability on my account. I remember when I applied for the account, and I was asked whether I wanted the capability for overdrafts, and I declined.
On the other hand, there have been times, not recently, when I thought I had enough money, I took some out, then an expected deposit happened that night, but the next day when I looked at my account records, there had been other withdrawls and the account dipped briefly below zero before it was refilled. At that point, I was charged an overdraft fee (of $15, I think) and a small amount of interest.
So I guess that was the same situation as the OP described. But I also remember getting a letter once that said, We’ve been doing this as a convenience to you, but you’be been taking advantage of it too much, so we won’t let the overdrafts occur any more."
Yeah - mine did the same thing, tried to talk about how advantageous this would be for you, etc. A teller clearly being strong-armed to talk this up informed me that if I didn’t get overdraft protection I could be “embarrassed” by getting my card declined and wouldn’t I really prefer to never be embarrassed like that? I said I’d rather be embarrassed than slammed with exorbitant fees for a $1 overdraft, and in any case, because I got a brain that’s crap at remembering numbers I get declined on a regular basis while trying to remember my PIN. So what’s the difference?
I got slammed by this when I was a naive 18 year old. I knew my account was running low, but I figured they wouldn’t let me pull money out of an empty account. I went about my day buying lunch, grabbing a soda at the drug store, etc. In the end, I ended up with over a hundred bucks in overdraft charges for one day’s oversight. As a student, that was quite a financial hit. I sure learned that lesson!
Two years ago, we had an overdraft on a checking account because I had recorded a transfer between accounts on Quicken, but not online with my actual bank (BofA). So, by my accounting we had the money in the checking account. I am normally ridiculously anal, but I had had back surgery and it just screwed up all of my organization systems for a bit.
We have three accounts with BofA–a checking, long term savings, and money market. The other two accounts had quite significant sums in them at the time. Previously, our checking account had been set up so that whenever an overdraft occurs, the money is just transferred from one of the other accounts with BofA (for a one-time $10 fee) into the checking account. I had assumed that was still the case. I about had a heart attack when I saw more than $300 in overdraft fees when I balanced the account one week. I called BofA, frantic and furious, wondering why the hell they cleared all of those transactions if there wasn’t money in the account. I wanted my card declined! Sheeeeez. (And FTR, 10+ years ago, that’s what happened when BofA accidentally recorded a transfer twice–my card was declined, and I went straight to the bank to find out why. It was their error, and fixed on their end.) I got a supervisor–who saw I had never had this problem before, and who also saw we had more than enough money in other BofA accounts–to waive half the fees, but not without some finger-waving condescension, and not before getting me signed up with the overdraft protection I already thought I had (apparently, when the bank changed the name of my account, they changed the overdraft protection too–I missed that in the fine print).
I now have email alerts from BofA that daily give me account balances, deposits, and (whenever applicable) low balance threshold notices. If I was anal before, I am absolutely OCD now.
Glad those stupid fees are outlawed now, though. I understand the banks want them, but geez, they could have at least pulled my hair when they bent me over.