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Banks Make More on Overdraft Fees than Loans

Thursday, July 12th, 2007 (No comments yet)
Consumeraffairs has been watching the banking industry with increasing shame. Banks realize how easy it is to "encourage" customers to make banking mistakes that end up in costly fees:
Common banking practices, such as clearing high-dollar debits before subtracting smaller debit amounts, holding deposits longer than necessary, and failing to decline overdrafts or warn customers at the checkout or ATM if they have insufficient funds, increase the number of overdrafts suffered by consumers
Note that these are concious, purposeful acts designed to bring more debt to the consumer. Let me explain one of the scenarios above: You make the following purchases during the day: Your account balance: $70 (It's almost payday, you're running low)
  • Sandwich: $5
  • Starbucks Coffee: $10
  • Socks, Flowers, and a DVD movie (you're at Walmart… One stop shopping): $35
  • Eggs and Milk: $5
    • Little do you realize, your wife has decided to go ahead an fill up the SUV for the weekend trip.
  • Gas: $65
    • Now, assuming that the bank takes care of all transactions at the end of the day, what's the most advantagous way for them to do this? Easy! Apply all debits in order of size. Watch what happens:
    Your balance: $70 -$65 (Gas) Your balance: $5 -$35 (Walmart) Your balance: -$30 (plus $20 overdraft) Your balance: -$50 -$10 (Starbucks) Your balance: -$60 (plus $20 overdraft) Your balance: -$80 -$5 (Grocery store) Your balance: -$85 (plus $20 overdraft) Your balance: -$105 -$5 (Sandwich shop) Your balance: -$110 (plus $20 overdraft) Your balance: -$130
    And to add insult to injury, maybe you got paid that day and deposited the money, but the bank held the deposit until the next day for no reason that you can think of (also part of their bag of tricks). So in this case, the bank's artificial policy of applying drafts in size order has hurt you plenty. If you complain (if) then there's a chance they'll reverse one charge as a matter of customer service. That still leaves you with a $60 debt to the bank. Compare it with this scenario where it was done in the order the drafts occured:
    Your balance: $70 -$5 (Sandwich shop) Your balance: $65 -$10 (Starbucks) Your balance: $55 -$35 (Walmart) Your balance: $30 -$5 (Grocery store) Your balance: $25 -$65 (Gas) Your balance: -$40 (plus $20 overdraft) Your balance: -$60
    Think I'm full of it? Check out this eerily appropriate Consumerist article posted today about a guy who's overdraft woes cost him $134 for a granola bar.
    In this case you have one overdraft fee due to a simple mistake. Chances are the bank will credit it and you and your wife can make sure you don't make the same mistake twice when the balance is low. Life is happy and birds sing… Anyway, you see how banks, who know a whole lot more about money management than you, can make very little and innocent csounding policy changes that will screw you royally. Let's hope that the bill that Consumeraffairs mentions in the article passes to end this kind of crap. Lastly, a freebie for you. If you are the kind of person who frequently finds themselves paying overdraft fees, try this trick I learned in my more "cash desperate" days:
    Have two accounts: your main and a second. When you know you're short for the month and need a few hundred dollars to prevent the main account from going under, "borrow" against your other account instead of going to the Payday Loan scum. Go to an ATM and withdraw $300 (or whatever your overdraft amount on the other account allows). You'll get a one-time fee (usually $18-$25). Use that to keep your main account current. When you get paid, put money back in the other account to keep it at about $0. This is way cheaper than paying a bunch of over-draft fees or using a payday lender. Just make sure your bank doesn't charge any monthly fees or "inactivity" fees on the second account.

    Update

    More on the topic from Consumerist.com.
    Chairwoman Carolyn Maloney (D-NY) of the House Subcommittee on Financial Institutions and Consumer Credit is holding a hearing today on unfair bank overdraft fees and their impact on consumers
    There's really a lot of news about this today, wow.
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