Overdraft Scam?
I’ve been reading some interesting articles recently. I’ve already mentioned how most credit card issuers are jacking up their interest rates in advance of the Federal regulations that prohibit such actions. I predicted that they would and they are doing it with wild abandon. There is another money extraction scheme that your bank probably uses and if you’ve ever overdrawn your checking account, you are probably a victim.
You should know that if you go to an ATM and try (accidentally or otherwise) to withdraw more cash than you have in your account, the ATM will gleefully spit out whatever amount you request, subject to some restrictions set by your bank. That will most likely happen with a debit card purchase too. You’ve just overdrawn your account. Of course you already know that. What you might not know is that the bank probably has a policy of clearing high to low.
What does that mean? Suppose you have $100 in your checking account. Four checks arrive at your bank in the following amounts: $15, $20, $30, and $150. If the bank clears them in that order, the first three are fine and only the last one incurs an overdraft fee. If they clear them in the opposite order, all four incur overdraft fees. The bank quadrupled their overdraft fees just by changing the order that they process the checks. And yes, they do it intentionally – for one reason. Money. With “overdraft protection fees” of $30 being common, that’s 300% interest on your $10 check!
According to Moebs Services, an economic research firm, “If it weren’t for overdraft fees, 45% of banks and credit unions wouldn’t have made money in 2008.” A recent article in USA Today says that this has been going on since the ’90′s when a consulting firm for the banking industry suggested the high to low scheme as a way of increasing revenue. This scheme has become much more lucrative recently with the proliferation of debit card purchases and ATM withdrawals, both of which are attached to your checking account.
Fortunately there’s an easy way to avoid the fees. Don’t try to spend more than you have. It sounds simple enough and yet apparently 45% of the banks in business today are profitable because their customers overdraw their accounts.
If you find yourself in a position where you must make a purchase and you don’t think your checking account balance will cover it, use a credit card. Then pay the amount in full when the credit card statement arrives.
