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photo credit: squidpants
Starting July 1, banks won’t be able to charge bounce fees on ATM or debit card transactions unless the customer has opted in to an overdraft service, the Federal Reserve announced today.
Bounce fees have become a real plague on the U.S. bank patrons, as banks quietly replaced true overdraft protection with “courtesy overdraft” or “bounce protection” services that patrons didn’t ask for–but that generate far more fee income. A single lapse can rack up multiple $35 fees, and many banks re-order transactions to maximize the chances transactions will bounce.
The Fed move is good, but isn’t enough, because:
- It doesn’t cover check or recurring-debit transactions
- It doesn’t cap the amount or number of fees that can be charged
- It doesn’t prevent banks from manipulating how they process transactions to increase fee income
Bills that would put such restrictions on banks have been introduced by Christopher Dodd in the Senate and Carolyn Maloney in the House of Representatives.
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Dear Liz: Like many Americans, I often must scramble to make ends meet between paychecks. I vigilantly monitor my account online, and when my balance is getting low, I curb my expenses as best I can.
Recently, I have had an overdraft experience that leaves me wondering about ethics and legalities. It was three days from payday and I had about $45 in my account.
I made four purchases under $10. Then a $54 automatic payment came through that I could not reschedule. One would think I would then be charged one overdraft fee, as all of the previous purchases made were within my available funds at the time.
I logged in today to find that the bank cleared the largest transaction first, which threw all other small transactions into overdraft. I was charged five overdraft fees because of this rearrangement of clearance order. I talked to a customer service manager who said that nothing could be done.
Essentially, it appears that the bank is manipulating transactions to capitalize on overdraft fees. This strikes me as unethical, and I wonder if I have any rights in this situation? Aside from getting a better job and making more money, what can I do to protect myself?
Answer: Of course the bank is manipulating your transactions to increase its fees. Most banks do. Lawmakers and regulators have questioned the practice, but so far it’s not illegal.
What you can do to protect yourself is to stop living paycheck to paycheck. That may sound like a flip answer when you’re on the financial edge, but you’ll never get ahead as long as a $54 overdraft can throw your finances into chaos.
Having just a $500 cushion in the bank can reduce not just bounced-check fees but also worry, sleeplessness and lost productivity at work, according to a savings review by Stephen Brobeck, executive director of the Consumer Federation of America.
How do you get a cushion? Try a “no spending” month. Limit your purchases to true essentials. Eat out of your cupboards instead of at restaurants. Entertain yourself at home or at the library. Most people can raise at least a couple hundred dollars this way, which you could supplement by having a yard sale and selling unneeded items online.
If you want more ideas, there are a wealth of frugal-living websites; start with one of the oldest, the Dollar Stretcher, at www.stretcher.com.
You also need to limit the bank’s ability to swamp you with “gotcha” fees.
First, sign up for true overdraft protection. Banks often automatically enroll you in an inferior substitute, called “bounce protection” or “courtesy overdraft.” These programs allow the banks to approve over-limit transactions and charge you $30 or more for each one.
True overdraft, by contrast, links your checking account to another of your own accounts: typically a savings account, line of credit or credit card. If your transaction exceeds your balance, the money is drawn from one of these accounts. You’ll pay an annual fee of around $50 and possibly a $10 per transaction fee, but the costs for making a mistake will be substantially lower than under bounce protection.
If the bank won’t approve you for true overdraft, ask it to stop approving over-limit transactions. If it won’t, take your business elsewhere.
The Federal Reserve wants to hear from you about your experiences with bounced-check fees, but your opportunity to influence future regulation is closing fast. The Fed’s comment period closes Monday.
Here’s what I wrote about a couple years ago about the relatively new phenomenon of “courtesy overdraft”:
A few years ago, banks would typically decline an ATM, debit card or check transaction if there wasn’t enough money in the customer’s account.
Today, however, many banks and credit unions routinely allow these transactions to go through and then slam their customers with overdraft fees. A single $5 transaction can trigger a $30 to $35 overdraft fee, while a series of overdraft transactions in a single day can rack up hundreds of dollars in fees, usually without warning to the customer.
These policies, often marketed as “courtesy overdraft” or “bounce protection,” have caught on like wildfire: The number of financial institutions employing fee-based overdraft services grew 80% between 2003 and 2005 to 3,500, according to the Center for Responsible Lending, and the fees charged now top $17.5 billion a year.
Some might say, “So what? Keep enough money in your account, and you won’t overdraw it.”
True enough. But few of us are perfect, and the penalty for even a single lapse can be ridiculous. The Wall Street Journal today quoted one man who paid over $500 in bounce penalties for a series of small transactions, and he’s far from alone.
What’s more, people don’t sign up for courtesy overdraft. It’s imposed upon them. The first time they learn they have it is typically after they’ve wracked up significant fees.
And some banks even encourage you to overdraw your account by adding the total amount of your “courtesy overdraft protection” when you check your account balance at an ATM. So you may think you have $300 in your account, but $200 of that is courtesy overdraft. Spend more than $100, and you’ll get slapped with fees.
This is punitive and unfair. It’s time banks were forced to come clean about how bounce fees work and give you the option of opting out.
If you agree, you can send your opinion to the Fed by using a form at DefendYourDollars.org, a Web site run by Consumers Union, publisher of Consumer Reports. CLICK HERE to access the form.
To protect yourself in the meantime, call your bank and opt out of courtesy overdraft, if you can. Try to sign up for true overdraft protection, which links your checking account to a savings account or line of credit.
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