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Weekly Dose of Dialogue: Overdraft fees

I'd like to start doing a semi-regular open discussion on topics I find interesting when reading online news. Some of these topics may be contentious and strongly emotional, though I hope to avoid those topics as much as possible. Today's topic, I think, won't be one of those.

Congress is riled up - Overdraft fees on CNN.com

How do you feel about overdraft fees? Have you been hit by these fees in the past? Was it 'fair' (e.g. you legitimately over-spent your account) or 'unfair' (e.g. bank processed a debit before a credit, even though the credit should have been processed first)? Are the fees reasonable? Is the IDEA of an overdraft fee reasonable?

Here's my thoughts.

Bank customers should not automatically be signed up for overdraft protection - any more than they should automatically be signed up for a credit card. Overdraft protection is a form of credit, and carries with it an obligation for repayment. A consumer should always enter that obligation knowingly and willingly.

When a bank customer signs up for overdraft protection, the fees should be disclosed clearly and completely, in advance. The customer then enters into the arrangement with full knowledge of what the expense will be, and can choose whether or not to incur that expense. If a bank wants to charge its customers $100 per overdraft transaction, that's fine with me, because they are under no obligation to provide that service at all, nor is a customer under any obligation to avail themselves of it.

However, I think overdraft fees should be based on the amount of the overdraft. It is certainly usurious to charge $100 (or $35 to use a more realistic example) for a $1 overdraft - 3500% interest? No thanks! Perhaps banks should instead charge a percentage (potentially with a minimum interest charge), as credit card companies do. In fact, if you have a credit card issued by the same bank as the account that goes into overdraft, they could even 'automatically' transfer the overdraft amount onto your credit card as a cash advance (if you sign up for that service.)

When processing transactions, banks should at the very least process them in the order they are made. If you deposit a large check that takes a few days to clear, and in the meantime draw on those funds in an amount that, prior to the check clearing, would cause an overdraft, the bank should refund that overdraft charge once the check clears - but keep the charge if the check fails to clear. A 'kinder' bank could even go so far as to process transactions in the order most favorable to the customer - for example, process all credits on a given day before processing any debits for that day, or process debits from smallest to largest to reduce the number of overdraft transactions even though the total dollar amount remains the same. Of course, if the overdraft fee is a percentage rather than a fixed amount, the number of transactions doesn't really matter anymore.

I've only had an overdraft fee once - and it was totally my fault.

What are your thoughts? What's your story?

Comments

( 16 comments — Leave a comment )
signaldancer
Oct. 7th, 2009 03:00 pm (UTC)
Well, there are multiple points here,
I agree with everything you said, however there is a caveat.

Some banks, if things go through on the same day, have been known in the past to intentionally arrange the transactions such that they will get the most overdraft fees possible.

Lets say that you have $500 in your account.
If you spend $60, then spend amounts of $5 and $7 on your debit card all in the same day, and that evening put $450 on it.

Realistically, one would think that since the bank allowed the charges to go through on your card, and you didnt know you were hitting your overdraft that last charge of $450, should be the one that will ding you.

Except no.
The bank will happily arrange it for you $450, $60, $5, $7 giving you 3 overdraft fees, not one.

It bears no relationship to what times the transactions actually went through (because lets be realistic, if you yourself had spent it in that order the bank wouldnt be arranging it in your favor for you, however, they'll happily arrange it to benefit them.)

I have a problem with this.
I think the timestamp that the transaction went through on, is the order they should be processed on. That way at least you can say multiple charges were your own fault.

Agreed on the above about a max charge that's much lower than some of the way the %s wind up now if you make a small mistake.
signaldancer
Oct. 7th, 2009 08:02 pm (UTC)
Reading later comments, yes, the auto overdraft buisness is crap too. I have had it turned off 3-4 times on my account, and it keeps getting "added" back on without my consent.

I have actually never hit overdraft fees. However, I have had to spend some hours on the phone avoiding them in some cases for things like a buisness putting 2-3x a large purchase amount on hold or other such insanity.

I eventually gave up on getting out of "overdraft protection", but I plan on leaving that bank within the next year or so.
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(Deleted comment)
toob
Oct. 7th, 2009 03:09 pm (UTC)
The first time I got overdraft fees, it took me totally by surprise. I was used to my bank card being declined if I didn't have money. My bank quietly switched their practice and I ended up with four OD fees all bunched together. I called and complained, and they belittled me, saying it was my fault. My request to have the overdraft "service" turned off was refused.

The second time I got them, one of them was my fault -- I had a few little charges, and the subsequent day one large one. The bank rearranged the order of the charges so that the big one went through first, and then each of the little ones, so I was charged $34 for each of a number of little purchases.

My opinion is that this sort of crap should absolutely be illegal. I'd also be in favor of a class-action lawsuit against every institution that pulled this nonsense. It's outright stealing, whether done through a loophole or not.
wolffit
Oct. 7th, 2009 05:57 pm (UTC)
I agree - and my recommendation would be to switch banks, find one with less rapacious practices.
murakozi
Oct. 7th, 2009 03:10 pm (UTC)
The only times I had issues with my account balance were back in college, which was kinda prior to overdraft protection. One case was entirely my fault. I'd deposited a check in my savings account and neglected to transfer funds to checking. I wrote a check at the grocery and while balancing the checkbook that evening, realized it wasn't gonna clear. Heck, I called the store and offered to go to an atm and give 'em cash, but it was too late.

The other time it was due to the bank's annoying policy of processing debits before credits. That one just taught me to be extra careful about when I made deposits.

I do agree that overdraft fees should be related to the amount of the overdraft. I've heard/read stories from people who went over by a few dollars then got hit with assorted fees that compounded each other into some crazy amount.

wolffit
Oct. 7th, 2009 05:57 pm (UTC)
Processing debits before credits should be illegal. Transactions should at least be processed in the order they are received.
pathia
Oct. 7th, 2009 05:26 pm (UTC)
The worst incident I had, was when federal student loans continued to withdraw from the wrong account.

I went -500 negative and I got the GOVERNMENT of all organizations to undo the billing almost instantly, however Bank of America refused to give me the 'credit' for the incident for 4-5days. I started getting hammered with $30 fines at least twice a day until they finally decided that the government's refund was 'legit'.
pathia
Oct. 7th, 2009 05:40 pm (UTC)
There was also the time I got my first electronic paycheck. The credit showed on my account, so it was there, but they decided to hold it for 7business days because they wanted to 'verify' that Siemens AG REALLY wanted to give me that money.

Even though the deposit showed on my account, it didn't actually go to by balance, and every charge that came in over that time, for you know just...LIVING, invoked overdraft fees. I had to throw a fit to get them to undo the charges, I sat on hold for about 4hours one day, going up the food chain over and over until finally they admitted they were wrong.
wolffit
Oct. 7th, 2009 05:52 pm (UTC)
Yeah, that goes back to my point about how transactions should be processed:
"If you deposit a large check that takes a few days to clear, and in the meantime draw on those funds in an amount that, prior to the check clearing, would cause an overdraft, the bank should refund that overdraft charge once the check clears - but keep the charge if the check fails to clear."

When my paycheck gets electronically deposited in my checking account, it shows up as a pending deposit usually at least 24 hours before it hits my balance - and it's always available no later than the scheduled pay date. If it takes time to clear, that time is eaten up prior to the expected deposit date, rather than being tacked on afterwards.

Of course, with all the electronic communication banks have now, there's no excuse for any standard deposit (paper or electronic) to take more than a day to clear, if it's not instantaneous.
wolffit
Oct. 7th, 2009 05:56 pm (UTC)
If you write a bad check, you're usually responsible not only for paying the fees your bank levies on you, but also those assessed by the bank the person deposits the check into. Every single institution you do business with has such a policy. You wind up paying twice, for one bad check.

Businesses that incorrectly charge you, debit the wrong account, or in any other manner initiate a transaction they should not initiate, which results in your bank charging you a fee, should be responsible for paying you the amount of that fee. Even the government.

I have found that on the one or two occasions when my bank charged a fee they shouldn't have, they've been quick to refund it. On the other hand, I use a relatively small, local bank and when I have problems I talk to the manager of the branch I do business with, in person (it's right down the street from my office so it's convenient). It's harder for the bank to be difficult, when they're dealing with a real person. That's one of the (many) reasons I don't use megabanks like BoFA for my daily cash flow account.
pathia
Oct. 7th, 2009 05:59 pm (UTC)
I've since dumped all banks except ING and while they follow US law here, their structure is setup like a Dutch bank. If you overdraft, there's no fee, you're just charged the monthly APR of whatever credit rate you qualify for with them, until you pay it back. You get a $150 limit, and if it hits that, your card is rejected.

For everything else, I just use my credit union, which doesn't charge any of these stuff what so ever. As long as your balance returns to positive in the same business week, they don't seem to give a damn.
wolffit
Oct. 7th, 2009 06:06 pm (UTC)
Yeah, ING's approach is reasonable, and not all that much unlike what I wrote about in the original posting. I think I'd prefer if it were something you could choose whether or not you want (what if you don't like their APR, and would rather use your credit card for purchases that exceeded your balance?)

There's no excuse for a bank NOT rejecting electronic transactions that exceed your funding level.

I think a better way of managing overdrafts, though, is to simply not use them - ever. Ideally, you should keep track of your account balances well enough (and have enough of a buffer) that any purchase that would cause an overdraft would go on a credit card instead, or simply not be made. I realize that not everybody has enough financial stability to have a safe buffer, but keeping track of balances isn't unreasonable.
pathia
Oct. 7th, 2009 06:07 pm (UTC)
With ING, you can say no to overdrafts at all and just have the account terminate at 0.
justincheetah
Oct. 12th, 2009 02:53 am (UTC)
Bank One
I ran into a problem with Bank One in my college days. I needed a cashier's check for a fairly large amount, and arranged (from bank of mom and dad) to cover it with a larger cash deposit the day prior. Imagine my surprise when I received an overdraft notice for the cashier's check. First, a teller issued the check. One wouldn't think they'd issue one in the first place in an overdraft situation. Second, when pressing the local branch about the issue, they stated my *cash* deposit had been placed on hold -- normal practice, they say!

After a rather pointed conversation about fraud with the branch manager, I closed my account, fees refunded. Crooks.

( 16 comments — Leave a comment )

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