Banks make a lot of money from basic checking and savings accounts. It may seem surprising that boring, basic accounts remain such big money-makers for the banks, but banks are making billions every year, largely because we stay with large traditional banks for no apparent reason. Banks call it “inertia,” and they profit from it.
On savings accounts, banks make money by paying depositors virtually no interest. Most major banks (including Bank of America, Citibank, Wells Fargo and Chase) pay an interest rate of only 0.01% on their savings accounts. And then they use the money customers deposit to make loans at much higher rates. So, we are basically giving interest-free loans to banks.
There is good news: we no longer have to settle with 0.01%.
Branch-free banks are challenging traditional banks by paying interest rates of 1% or more. That may not seem like a big number, but it can be. If you have a $20,000 savings account, that is the difference between earning $2 or $200 of interest a year. We have compiled a list of the highest interest rate savings accounts, which we update daily. The banks do not pay us, so our recommendations are completely unbiased.
After raking in money on savings accounts, Banks turn their attention to checking accounts. Banks make most of their money by charging the following fees:
- Overdraft fees: which represent approximately 60% of the fees charged by banks. Only 10% of the population pays 75% of the fees, and they tend to be the most economically vulnerable, including our troops.
- ATM fees: which can add up quickly. If you go out of network, you pay ATM fees to two banks: your bank, and the bank that owes the ATM
- Monthly fees: which most people get waived. A direct deposit or minimum balance usually takes care of this fee.
And these numbers add up quickly. We have used FDIC data to see which banks charged the most per branch in fees on checking and savings accounts. Although we expected big numbers, even we were surprised at how much fee income was generated. Bank of America was the worst offender of the big banks, generating nearly $1 million per year per branch in fees. Every time you drive by a Bank of America branch, remember that the bank is earning $1 million in annoying fees alone.
We list the fees per branch below. But, just like with savings accounts, there are new alternatives out there. You can now get a bank account with no monthly fee (and no direct deposit requirement), no ATM fees (including reimbursement of other bank ATM fees) and no overdraft fees. Some of our favorite options include Bank of the Internet and Ally Bank. But you can compare all of the account on our checking account page.
If you are drowning in overdraft fees, or travel and are tired of ATM fees, then switching is a no-brainer. But, you may be thinking that you never pay any fees and don’t really have any problems with your bank. I was in that camp. But then I decided that I didn’t want to stay with an organization that just waits for me to make a mistake, and then charges an outsized fees. Like any other industry, I want to reward better organizations with my business, and I switched to Ally.
Stay Up to Date
At MagnifyMoney, we want people to get in the habit of comparing, ditching and switching. If you find a gas station with cheaper gas, you switch. But, most Americans just stay with their bank. We want people to pay attention to the rate, tricks and traps and be ready to switch when a better deal is out there.
To keep you informed, we created our PriceChecker email, which goes out twice a month. With a quick glance, you can see if you have the best rate on your savings account. We also show the best mortgage rates, credit card deals and cashback rewards. And, whenever we find a fine print trap, we let you know about it. You can sign up for our email list here.
#1 on the list is Fort Hood Bank, targeting the people who serve our country in the armed forces. Their customers will likely have limited assets, and the fee revenue will likely be dominated by overdraft and NSF fees.
#2 on the list is Cole Taylor Bank, which has made news targeting college students on financial aid, who also have limited assets.
#3 on the list is The Northern Trust Company, a private bank. The average account generated $477 in fees last year. They have 77 offices.
#4 is Bank of America, with 5,319 branches. BofA looks particularly bad when compared to the other big 4 banks:
Bank of America charges, by far, the most fees per branch. 23% more than Wells Fargo and 27% more than Chase.
Citibank only generates $278,210 per branch, 72% less than Bank of America. Citi does not have an extended overdraft fee.
At MagnifyMoney, we believe that the overdraft market is ripe for disruption. The revenue generated from the activity bear no relation to the cost of providing the service. My thoughts on how we can make the system better are here.
Wells Fargo and Overdrafts: They Still Don’t Get It
Today, Wells Fargo lost its appeal to overturn a verdict requiring the bank to compensate customers $203 million for manipulating transaction posting in order to increase the amount of overdraft fees that they charged.
In 2001, Wells Fargo changed the order in which they posted transactions. Rather than posting transactions in the order in which they happen (which would seem obvious), they would batch post them from “high-to-low.” Essentially, they were posting transactions in the order they wanted them happen, rather than the order they actually happened.
Here is an example of how that can impact you. Imagine you start the day with $100 in your bank account. Then:
- At 9AM you spend $10 at a coffee shop (new balance $90)
- At 12PM you spend $25 on lunch (new balance $65)
- At 5PM you spend $30 at the bar, and (new balance $35)
- At 8PM you spend $50 at a restaurant (new balance -$15. You are overdraft)
If you processed the transactions in the order that they were posted, then you would have one overdraft transaction, costing you $35 (the typical overdraft fee).
Wells Fargo was not happy with making only one overdraft fee. So, they changed the rules. Instead of posting them in order, they waiting until the end of the day, and then posted the transactions from the highest to the lowest. Here is what that means. Your start with $100, and then:
- Post the $50 restaurant transaction (new balance $50)
- Post the $30 bar transaction (new balance $20)
- Post the $25 lunch transaction (Overdraft #1, -$5 balance)
- Post the $10 lunch transaction (Overdraft #2, -$15 balance)
Once you reorder the transactions, you increase the number of overdraft transactions. In the re-ordered example, you are now going to pay two overdraft fees, which would be a $70 charge (instead of $35).
When I explain this process to people, most people can’t even imagine that this could be legal. But it is legal. In fact, nearly 50 percent of banks still process transactions in this way.
In 2001, Wells Fargo clearly made this change to increase revenue. And customers clearly did not understand it. (In fact, it is such a crazy way to post transactions that it takes a bit of time to explain.) The lawsuit is not about the legality of high-to-low processing (which is legal). It is about false and misleading statements that cost people a lot of money.
Wells Fargo has been appealing. They don’t think it is misleading, and they don’t want to reimburse the fees that they charged. And they will likely continue to appeal. I find that the most distressing part of this case (and others like it). If banks continue to defend this practice, and the way the explained it to customers, publicly, then I have severe concerns about their ability to service customers.
Do you think you were a victim of this?
To find out the current status and how to claim, visit http://www.bank-overdraft.com. At this website, you can see exactly what you need to do
If you still have questions or concerns, you can and should make a complaint directly to the Consumer Financial Protection Bureau.
How to deal with a bank that thinks reordering is fair
Overdrafts, even without the devious cheating of transaction reordering, are some of the most expensive and extortionate ways to borrow short-term money in the country. A payday lender charges $15 to $20 for every $100 that you borrow. At the worst bank in the country (Citizens), you will pay $83 to borrow $100.
There is good news: new internet-only (branch-free) banks are looking to shake up the entire fee structure. Because they don’t have branches, they have much lower costs. And they pass that savings along to consumers by paying higher interest rates on savings accounts and eliminating virtually all fees.
You can find the best checking account for your needs in our checking account marketplace. And some of our favorites include:
- Bank of Internet Rewards Checking, which charges no monthly fee, reimburses all ATM fees, offers a free transfer from savings to checking, and has no overdraft of NSF fees.
- Ally Bank, which charges no monthly fee, reimburses all ATM fees, and will automatically transfer money from a high-rate savings account to your checking account for free to cover an overdraft. If you have no money, then you will never be charged more than $9 per day in overdraft fees
Want regular updates about the best financial products out there? Then sign up for our Price Checker Newsletter. Twice a month, we’ll deliver the best-of-the-best right to your inbox.
The Best and Worst Banks for Overdraft Fees
This week, MagnifyMoney provided information to American Banker for a story on overdrafts. The CFPB has indicated that it will start treating overdrafts as short-term lending. We couldn’t agree more: overdrafts are short-term loans, plain and simple. However, because banks charge “fees” instead of interest, they get away with outrageous pricing. In my entire banking career, I have never seen a more expensive form of short-term borrowing than an overdraft at a large American bank.
In our analysis, we looked at a simple $100 overdraft. The customer would pay back the $100 in 10 days. And then we ranked the biggest banks to see which institutions charged the most, and the least.
The absolute worst bank was Citizens Bank, where it would cost $83.93 to borrow $100 for 10 days. The best was Ally Bank, where it would cost $9.
Why such a big difference?
If you really want to save money on banking fees, you need to ditch the traditional brick-and-mortar banks. New, challenger brands like Ally (and others, which you can find on our checking account page) have completely re-written the rulebook. They just don’t charge punitive overdraft fees.
But, even with the big banks, there are big differences between them. Although the headline overdraft fee ($35 per incident) is high and relatively consistent, there are other bits of the fine print that you have to navigate. Namely:
- How many times per day will they charge the fee? For example, Chase will only charge three times per day, whereas Citizens Bank will charge seven times. Yes – seven times in a single day!
- Is there an extended overdraft fee? Some banks will charge you again if your balance remains negative. At Bank of America, they will charge you $35 after five days. Citizens, the worst of the banks, will charge $6.99 per day, from day four. And Capital One will not charge any extended overdraft fee.
So, that $100 overdraft would cost $34 at Citi, $49 at Chase and $71 at PNC.
What should I do?
At the very least, don’t bank with Citizens. Their pricing is outrageous.
The best option is to switch to an internet-only bank, where the overdraft fees have been virtually eliminated.
If you want to stick with a bricks and mortar bank, make sure you choose one that limits the per-day charge and does not have an extended overdraft charge. Citibank and Capital One Bank are both good examples in that category.
Why is American Banker doing this story?
Banks that depend upon overdraft fees for their income need to be concerned. This is “easy money” for them. Any time you have predatory pricing on lending, you can generate sizable revenues. But, those revenues won’t last.
Thankfully, the CFPB is going after overdrafts. We will see where it ends, but the profit pool will definitely shrink. American Banker was interested in seeing who are the winners (like Ally, who don’t depend upon overdraft fees), and who are the losers (like Citizens Bank). Not only can the losers expect to lose significant income streams in the future, but also they should be wary of potential punitive action, lawsuits and customer attrition.
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You’ll Be Shocked Where We Found The Best Savings Accounts
Interest rates are low, but just because they are doesn’t mean you can’t shop around for a much better savings rate.
If you’re keeping your savings at your local bank branch you’re missing out on the best rates. In fact, there are safe online-only alternatives that pay 100 times more interest than the 0.01% rate you’re probably getting at your local bank.
On $25,000 in savings, that can mean an extra $247 a year in interest. And unlike CDs there are no early withdrawal penalties. Your deposits are also fully FDIC insured.
Here are some of the best rates available right now from nationwide online banks as of September 15, 2014:
1. Salem Five Direct (1.00%)
Salem Five Direct offers 1.00% on all balances up to $500,000 with no fees or other restrictions. Salem Five Direct is the online subsidiary of Salem Five bank in Massachusetts, founded in 1855.
2. Synchrony Bank (0.95%)
Formerly GE Bank, the Synchrony Optimizer Plus High Yield Savings offers 0.95% on all balances. There is a $5 per month fee if you let your balance fall below $50. You can withdraw over the phone, with an ATM card, or by online transfer.
3. CIT Bank (0.95%)
If you hold a daily balance of $25,000 or more, CIT will offer a 0.95% rate. Otherwise you will earn a lower 0.90% rate. This is less generous than Synchrony, which has no daily balance requirement to earn the highest rate. CIT has been in business for over 100 years as a commercial bank.
4. Ally Bank (0.90%)
Ally is a great simple bank that is well known for its customer service standards, winning Best Online Bank three years in a row. Ally offers 0.90% with no minimum deposit or maintenance fees of any kind. When you want to withdraw funds, you can do it over the phone, online, or do a check request or wire transfer. Just note that wire transfers have a $20 fee.
Many people with an Ally Savings account have a checking account with them, and enjoy no ATM fees of any kind. Ally reimburses any ATM fees other banks may charge at the end of the month, so you’re free to access your money anywhere.
Be sure to use our customizable comparison table to find the best savings account for you.
Shockingly, Bank of America Is Actually a Good Option for Someone
This week, two new products have been announced that specifically target the un-banked:
- Citibank Access Account
- GoBank, in partnership with Wal-Mart
Nearly 10 percent of Americans do not have bank accounts, and these new products promise to make it easier and cheaper for people to enter the banking system. These accounts come after the introduction of Bluebird (by American Express), Liquid (by Chase), Safe Balance (by Bank of America) and Opportunity (by Wells Fargo).
If you need access to a basic account, but have difficulties opening an account (because of bad previous history that is now reported on your Chexx Report), or you want to avoid the high overdraft fees, these accounts could be for you.
None of the accounts offer the ability to borrow money. So, you should only view these as low-cost transaction accounts, and will need a separate strategy (like a credit card from your local credit union) for any borrowing needs you might have.
We have reviewed the products to see which offers the best deal.
No account is perfect. In summary:
- If you need to write personal checks, and you don’t mind a six day hold on check deposits, then BlueBird is for you
- If you don’t need to write checks, then:
- Citi is best if you have a monthly direct deposit, or you can keep at least $1,500 in your account
- Bank of America is best if you don’t have a direct deposit or high level of funds to keep in the account
And the cheapest account is….
Bluebird by American Express is the cheapest account:
- $0 monthly fee, with no direct deposit requirement and no minimum balance requirement
- No overdraft and NSF fees
- MoneyPass ATMs are free; $2.50 at other ATMs
If you have a monthly direct deposit, you can have a fee-free account at GoBank, Wells Fargo or Citi. However, GoBank has long check hold times, and Wells Fargo still has expensive overdraft fees.
If you do not have a direct deposit, then the cheapest accounts are Chase and Bank of America (both at $4.95 per month). However, Chase does not offer BillPay, whereas Bank of America does.
The most services are offered by….
Bluebird by American Express enables BillPay and the ability to write checks. None of the other accounts offer check writing.
If writing checks is not important, you still have access to BillPay at Bank of America, Citi, Wells Fargo and Go Bank.
Ability to Deposit Funds
The banks (Chase, Bank of America, Citi and Wells Fargo) enable access to their branch and ATM network. In addition, for any deposited check, $200 would be made available on the next business day.
However, Bluebird and GoBank have very long hold times (they do not promise less than six days).
None of these products are perfect, but they could be useful if you need access to a bank account.
If you don’t deposit checks, than BlueBird could be a great option. The Wal-Mart cash register becomes your branch, and you can keep this account completely free. However, the long hold time may make this account impossible to use.
If you do need to deposit checks, and don’t have a direct deposit, than Bank of America has the best offer. You will need to pay $4.95 per month, but you get access to the entire Bank of America network.
Unfortunately, none of these products offer overdraft protection at reasonable prices. If you need to borrow money, you will need to find other options.
When Free Actually Means Free: Shockingly Good Checking Accounts
People hate paying fees. And there is nothing worse than hidden fees, ridiculously expensive fees, or both.
Checking accounts have been around a long time. In all of that time, banks have found lots of ways to charge annoying, expensive fees. And, the big banks (Citi, Chase, Wells Fargo and Bank of America) are the worst. With checking accounts, banks make their money in four ways:
- Monthly account fees
- ATM fees
- Overdraft / NSF fees
- Big balances (with no interest)
We have reviewed thousands of bank accounts. And here we introduce you to the best. There is a theme: if you want an amazing account, you have to give up branch banking. You are paying far too much for the “convenience” of branches. And we will show you why.
The Best No-Fee Checking Account (without the ability to go overdraft)
NO monthly fee, with no minimum balance or direct deposit requirement
NO ATM fees,including reimbursement of fees charged by other banks. You can use any ATM in the country for free
NO Overdraft or NSF fees, ever. If you make a mistake, the transaction will be declined and you will not be charged a fee.
In addition, they have great online and mobile functionality, as well as an onshore call center that can help you with your customer service needs.
In addition, you do have the opportunity to earn interest on your checking account. You can earn a total of 1.25%. Each of the following items helps you to earn 0.42%:
- 0.42% for a direct deposit of at least $1,000
- 0.42% if you use your debit card 10 times a month
Another 0.42% if you use your debit card 15 times
So, if you have direct deposit and use your debit card 15 times, then you earn 1.25% (0.42% + 0.42% + 0.42%)
If you often go overdraft, then this is not the account for you. However, there is an account made just for your needs.
The Best Checking Account for Overdraft (you need short-term borrowing)
If you find that you regularly go overdraft and need the option for short term borrowing, then there is no better option than Capital One 360.
NO monthly fee, with no minimum balance or direct deposit requirement.
NO ATM fees. However, you will not be reimbursed for other bank ATM fees. To avoid ATM fees, you have to use Allpoint ATMs
To sign up for overdraft protection, you have to apply for a line of credit. Once that line of credit is set up, then Capital One does not charge a fee for transferring money from the line of credit to the checking account. You are only charged interest for the days that you borrow the money.
For example, if you borrow $100 for 10 days, then you would be charged:
- $70 at Bank of America
- $0.31 at CapitalOne 360
But, don’t I need a branch?
Both of the accounts that we highlight in this article are internet-only banks. That means they do not have branches. (At CapitalOne 360, you do not have access to the Capital One branch network).
For most people, branches are truly a thing of the past. However, you may still need a branch if:
- You handle a lot of cash, including the need to make frequent cash deposits
- You need to generate cashier’s checks on a moment’s notice. (That may only happen once a year, when you sign a lease)
To get access to a branch network, without getting stuck into their fee structure, we recommend that you:
- Choose the internet-only bank account that makes the most sense for you, and then
- Put the minimum amount required into a traditional checking account so that you have access to their branches.
To find a traditional branch where you can open a bank account, you can use the MagnifyMoney checking account tool. Input your zip code, a very small amount of money that you would keep in the account (for example $215) and look for the first cheap option near you.
In this zip code, you find M&T Bank with no charge. It is completely free checking. (The other fees are very high, so you don’t want to use it for everyday banking. But, you can open an account so that you can use the branch if you ever need to deposit cash, get a cashier’s check, or do any other branch-based banking).
Branch-free banks are great. You can get an account with no monthly fees, free use of any ATM (of any bank) and no overdraft fees. Checking accounts are old and boring. You shouldn’t have to pay for them.
Banks That Will Pay For Your Broken iPhone
Buying a new iPhone 6? You might want to think twice before shelling out $99 for AppleCare protection.
That’s because several banks and credit unions offer credit cards with a little known perk called Cellular Telephone Protection coverage, which will reimburse you if your phone is damaged or even stolen.
It’s a leg up on AppleCare, which won’t cover you for theft. And it’s on top of warranty extensions or purchase protection your card might already offer.
MagnifyMoney.com reviewed the coverage of over 25 banks and credit unions that offer this feature, and here are the findings:
What do you need to do?
Just pay for your monthly cellular plan with the eligible credit card. Each month you do, you’ll be covered. You don’t need to buy your phone with the card, so any phone you have can get coverage as long as you start paying the monthly bill with your card.
How much does it cover?
It varies from $200 to $600 per incident, with Wells Fargo offering the most generous coverage at $600 per incident reimbursement:
|Wells Fargo: $600|
|First Citizens Bank: $500|
|Credit Union West: $250|
|Purdue Federal Credit Union: $250|
|Suntrust (Visa Signature only): $250|
|Energy Capital Credit Union: $200|
|Fifth Third: $200|
|University and Community Credit Union: $200|
|Aggieland Credit Union: $200|
|Education Credit Union: $200|
|Greater Texas Federal Credit Union: $200|
|IBM Southeast Credit Union: $200|
|Scott Credit Union: $200|
|UnitedSA Credit Union: $200|
And you can do it for as many years as you’d like, unlike AppleCare which will only cover you for two years and ends completely after two incidents.You can request reimbursement twice per year, so for example with Wells Fargo you could get $1,200 covered each year.
What is the deductible?
It’s better than AppleCare, which charges you $79 per incident for damage.
Wells Fargo charges just $25 per claim. Most other banks and credit unions with the coverage charge $50, still better than AppleCare.
How does replacement work?
If your phone can’t be repaired, the insurance provider will pay for a replacement purchased directly from the store (in person or online) of your wireless carrier.
There is a catch: your phone might be more expensive than $600 when bought brand-new without a contract extension.
New iPhones run $649 to $800+ depending on features.
So, you might be on the hook for an extra $200 or $300 if you badly damage the phone in its early days.
But that’s a reasonable price to pay considering you’re getting the insurance at no upfront cost to you.
Insurance direct from your wireless provider often costs $50 per year or more, and it carries deductibles as high as $150 or more for more expensive phones.
If you’re someone who wants insurance on your phone, it’s probably worth opening up an account with a bank or credit union that offers superior protection.
Personal Finance Education Can Prevent Overdraft Charges
The simple mention of overdraft charges is enough to cause metaphorical steam to start pouring out of people’s ears while their eyes fill with very real rage.
During a financial literacy workshop at Brooklyn College, the MagnifyMoney.com team discovered one simple way to prevent future debt and unnecessary bank charges: education.
Unfortunately, modern collegiate curriculums are woefully lacking in personal finance education. While personal finance is arguably one of the most important skills a person uses throughout his or her life, there is little to no mention of how to handle money during a students’ college career.
The two-hour workshop with Brooklyn College students proved how quickly important financial information can be passed along in a meaningful, understandable way.
MagnifyMoney’s co-founder, Nick Clements, looked around at a group of 40 students and inquired, “how many of you have paid overdraft fees to your bank?”
About five students shot their hands shot into the air, before ten or so more cautiously admitted to a financial fumble.
“And how many of you felt paying $35 to your bank for a potentially small mistake wasn’t a big deal?” Clements pressed?
The anger about being charged an overdraft charge suddenly electrified the room before one student broke the tension.
“I felt duped,” he said. “I didn’t even realize my account was so low and then an unexpected charge came in and caused me to go into overdraft for just a few dollars.”
Another student admitted to being charged about $70 because he ended up with two overdraft charges on the same day.
“Have you ever considered ditching your bank to find one that didn’t slap you with such heavy fees?” Clements asked the group of students.
A pregnant pause followed his question before he continued to explain you don’t have to remain in a bad banking relationship.
In fact, MagnifyMoney.com emphasizes how banks don’t reward loyalty, so customers needn’t give their banks the same kindness.
Banks are focused on acquisition. The way banks can afford to lure in new customers with deals like $250 bonus to open a checking account or $100 cash back after the first $1000 spent on a card, because they increase costs on existing customers.
Overdrafts are just one way that banks rake in massive amounts of money to protect their bottom line while spending the money to court potential customers. In fact, Bank of American annually generates nearly one million dollars per bank branch in hidden fees alone. Hidden fees include overdraft charges, ATM fees, monthly maintenance fees and non-sufficient fund fees. So just one Bank of American on the corner of a city block is bringing in almost a million bucks simply by charging existing customers fees.
The rise of Internet-only banks has made it much easier to get rid of many of these hidden fees. Banks like Ally, Simple, Bank of Internet USA and Charles Schwab reimburse ATM fees, don’t require a minimum deposit or monthly maintenance fee, and provide legitimate overdraft protection or much cheaper fees or even no overdraft fees.
For those ready to take the plunge and leave their bad banking relationships behind, MagnifyMoney.com offers a simple way to evaluate the best bank (or credit union) for you. Simply go to our Checking Accounts comparison table and customize it for your situation. We also recommend doing a separate search for a savings account to ensure you’re getting the highest interest rates available.
Don’t deal with a bank that may slap you with a $35 fine for a $2 mistake. The punishment simply doesn’t fit the crime. Switch to a financial institution that will treat you with respect and save you money in the process.
New Study: Overdrafts confuse, extract and exploit
The Pew Charitable Trust has just released a report on bank overdrafts. Not surprisingly, the report shows that consumers are confused, unhappy and willing to take action. The report also shows that, although the median overdraft fee is $35, people paid an average of $69 for their most recent overdraft. In the majority of overdrafts people borrow less than $50 for fewer than 4 days.
So, people spend, on average, $69 to borrow $50 for 4 days. No wonder they are confused, unhappy and willing to take action. Overdrafts in the US are often more expensive than payday lending. And their structure makes them one of the most expensive forms of short-term borrowing in the world, as I have previously outlined here.
Unfortunately, the complexity of the system makes it difficult for people to understand the true cost of overdrafts, compare options and – when they do take action – switch to a bank that is actually better. At MagnifyMoney, we are trying to help people compare, switch and save.
52% of overdrafters do not believe they have opted into overdraft coverage.
One of the biggest myths out there today is that you can opt out of overdraft protection entirely. You can not. Regulation E only allows you to opt out of overdraft (and avoid fees) for any ATM or debit card transaction. So, even if you opt out of overdraft coverage, you could still be paying overdraft fees on checks and electronic payments (like your car insurance that is debited monthly, or billpay that you complete online).
No wonder people are confused. They are told they can opt out of overdraft coverage, and they think they have. But then the car payment is automatically debited and they are hit with a fee.
Most overdrafters paid 3 or more penalty fees
An overdraft is simply a short-term loan. But, rather than charging interest on money borrowed, banks charge fees per incident. You make one mistake and get charged $35 (the famous $40 latte).
Even worse, many banks levy extended overdraft fees. Every day that you are overdraft could result in more fees being charged. At Bank of America, for example, you will be charged another $35 if you do not pay back your overdraft in 5 days. So, you could be charged $70 to borrow $5 for 5 days.
The report shows that 58% of people learn about their overdraft via the monthly statement or the mail. Given the time lag, that increases the chance that people will pay an extended overdraft fee. And it is not surprising that the average incident costs $69 in the study, compared to an average $35 fee.
This adds up to a lot of money. We looked at fee income by branch, and every single Bank of America branch is making nearly $1 million every year.
Willing to Take Action
28% of overdrafters say they closed a checking account in the past because of overdrafts. 19% wanted to discontinue the service.
Overdraft policy at traditional branch-based banks is like the song lyrics of Hotel California: you can check out, but you can never leave.
People trying to opt out need to recognize that they can not. They will only be able to opt out of debit and credit overdraft coverage. But checks and electronic payments will still continue to hit them.
Comparing overdraft policy between traditional branch-based bank accounts can be very difficult, and banks make it difficult on purpose. But, if your goal is to avoid the risk of either a $35 overdraft fee or a $35 NSF fee, it will be almost impossible to find a traditional bank that does not charge fees that high.
Only banks without branches (internet banks) are truly revolutionizing the way that overdraft fees are being charged. For example:
- Ally Bank only charges $9 per day that you go overdraft. And, if you have money in a linked savings account, they will transfer the money at no cost.
- Bank of Internet USA has no overdraft fees and no NSF fees
- Capital One 360, the internet-only bank of Capital One, will transfer money from a line of credit for free and will only charge interest for the days that you borrow the money. They treat an overdraft like the loan that it is, and dramatically reduce the costs as a result.
We find it interesting that Capital One has re-written the rules on overdrafts for their online bank, but have kept the old system in place for their branches.
People are angry and unhappy. But, switching from one traditional bank to another will not solve the problem. And opting out will not provide complete protection. For people looking to eliminate overdraft fees entirely, they will need to consider branch-free banking. You can compare bank accounts here. And we have put together some educational material (including video) on overdrafts as well.
Banks will continue to charge overdraft fees as long as they can get away with it. The fees are completely out of proportion relative to the service provided. I encourage you to consider ditching your traditional bank completely. I switched to Ally, and haven’t looked back. With overdraft fees, you are paying a lot for the convenience of a bank, and you have to ask if it is worth it.
The Cost of an Overdraft in Chattanooga
If you go overdraft, banking fees can be very expensive. And the rules are not always clear or easy to understand.
MagnifyMoney.com went on the road last week, and spent 3 days in Chattanooga, working with people and helping them save money. We met a lot of people who have been hit with overdraft fees.
We have reviewed the FDIC regulated banks serving Chattnooga in Hamilton County. There are $6 billion of deposits sitting in 14 banks, with 104 branches.
The average overdraft fee in Chattanooga is $33 per incident, with a range of $24 (Citizens Tri-County Bank) to $36 (SunTrust, Regions Bank, FSG, BB&T, Synovus, First Citizens Bank & Trust).
But beware the extended overdraft fee. If you account remains negative, 43% of Chattanooga banks will continue to charge you fees. That is why the actual cost of $100 overdraft for 15 days can range from $29 to $77. Choose your local bank wisely if overdrafts are an issue.
We also think you should consider an online bank (like Bank of Internet), which charge no overdraft fees and no NSF fees. I switched to an online bank, and haven’t looked back. You can look at the options on our checking account comparison page.
Here is the result of our survey:
Do You Have the Right Overdraft Protection?
Unless you keep your money in a tin can underneath your bed – which we don’t advise – you’re subjected to the fine print policies of whatever financial institution you trust with your assets. Unfortunately, the banks sometimes come off as something more akin to Tony Soprano than a knight guarding your wealth.
The restructuring of transactions (or “high to low processing” as the banks call it) is one way to force you into paying more fees if and when you go overdraft.
Be sure to read What are Overdraft Fees?
I thought the government passed a law to protect me?
Yes, the government did pass Regulation E, but most of the old tricks remain in place and high to low ordering is legal. Some of the biggest banks stopped the practice in an attempt to appease regulators, but ironically smaller banks are the ones most likely to still be reordering your transactions.
The protection of Regulation E is related to debit and ATM transactions. You have the right to opt out of overdraft for debit and ATM. If you opt out, then your transaction would be declined and you would not be paying the overdraft fee for going into negative numbers. But remember that some banks still charge you a NSF (non-sufficient fund) fee. But for checks, electronic transactions (which include using your debit card as a credit card) and bank fees, the practice remains exactly as it was.
Can I enroll in protection?
Yes, you can.
Protection means that you link an account (usually a savings account, credit card or line of credit). If your checking account does not have enough money, then money is transferred from your savings, credit card or line of credit.
This doesn’t save you from fees though. Banks will typically charge a transfer fee to the checking account. The fee is usually somewhere between $10 to $12 per day that you have an overdraft.
If you link your savings account, then it is very straightforward. You pay the bank to transfer money from your savings account to your checking account. You’re still forking over $10 to $12 for something that costs the bank fractions of a cent.
If you link a credit card, the story is more complex. Most credit cards will charge you a cash advance fee, and will start charging interest at the cash advance rate from Day 1. That rate is usually close to 30%.
Linking a line of credit is usually the cheapest way to borrow. Typically there is no fee on the line of credit, and the interest rates tend to be lower. Not surprisingly, lots of credit unions offer a line of credit. Of the Big 4 banks (Bank of America, Chase, Citi and Wells Fargo), only Citibank offer a line of credit.
Overdraft protection doesn’t protect from fees
Back to the Tony Soprano reference, buying protection doesn’t entirely protect you. Even if you enroll in overdraft protection, you can still be charged an Overdraft or NSF fee. If you link your savings account, and there is not enough money in the savings account, then you would be charged an NSF or Overdraft fee.
Is this fair?
We don’t think so. But our job is to help you understand the rules and find the best way to avoid fees.
How Overdraft Fees Silently Rip You Off
It’s Thursday, the day before payday. You only have $50 left in checking and have forgotten that your gym membership of $70 will be automatically debited from your account today. Normally, you’d transfer a little bit out of savings to cover the cost if you needed to, but you didn’t do it in time. The bank approved your gym’s charge and now your balance is negative $20.
Whoops, you’ve gone overdraft.
33% of Americans have gone overdraft in the last year
In a recent survey, MagnifyMoney discovered 33% of Americans have gone overdraft in the last year. If you haven’t yet, it is bound to happen at some point. Either we make a mistake, or we actually run out of money.
Going overdraft in the United States – even accidentally – is one of the most expensive ways to borrow money in the world.
Banks charge effective APRs > 1,000% – making them worse than payday lenders
Banks have purposefully made the system obscenely complex.
Banks regularly re-order transactions in the background, increasing the fees you pay and stacking the deck against you
The U.S. always wants to be #1…
Unfortunately, overdrafts in the US are the most expensive form of short-term borrowing I have seen in the world. Yes – it is more expensive to borrow here than in the UK, Russia or Mexico! Banks made $32 billion last year in overdraft fees alone. And, in our survey, borrowing $100 for 7 days could cost up to $300 in fees!
How do fees work?
In the example of the gym membership, the bank has 2 choices: approve the transaction or decline the transaction.
If they approve the transaction, then you go overdraft and will be charged an overdraft fee. The average fee is about $35 per incident. You can be charged multiple times a day. One of the worst examples is Citizens Bank, which charges $37 per incident, up to a shocking 7 incidents per day. I’ll save you whipping out the calculator, that’s $259 in fees for a single day!
When your account is overdrawn, the balance is negative. You have to bring the balance positive (by putting money into the account), or else you will be charged an extended overdraft fee.
At Bank of America, you would be charged another $35 if the account is negative for 5 days. And remember: you have to cover both the amount you borrowed and the fee. In the case of the gym membership – you would have to pay the $20 you borrowed and the $35 fee in 5 days, otherwise you are charged another $35!
If the bank decides to decline the transaction, you still get charged a fee. This fee is called an NSF fee aka non-sufficient-funds fee. And, guess what? The fee is still a shocking $35 per incident.
So: you are charged $35 if it is approved or declined.
Doesn’t the bank also mess with how my transactions are posted?
In a normal world, transactions that take place at 8AM will be deducted from your checking account at 8AM. Unfortunately, the rules are stacked against you. Rather than posting the transactions when they actually happened, a lot of banks post transactions when they wish they would have happened.
Nearly 50% of banks use what is called “high to low processing.” They take all of your transactions from the day, and deduct them from your account from highest amount to lowest amount (and they do this at the end of the day). That means you will go overdraft sooner, and you will pay more fees.
Imagine you have a balance of $50. You have 2 transactions: a morning trip to Starbucks for $5, and then dinner for $55. If the transactions were posted in order, then you would only have one overdraft transaction: the dinner for $55.
If the transactions were posted from high to low (and not in the order they happen), then you would have 2 overdraft transactions! At an average bank, that would increase the fee from $35 to $70!
And that is perfectly legal.
Tell us about your worst overdraft fee and then read on about overdraft protection.
Calling Out the Banks: Fix the Overdraft Market
Overdraft protection sounds like a program that would, I don’t know, protect you? Instead it helps lessen the fees but still gives banks the opportunity to charge you $10 to $12 (if not more) for transferring your money to cover an overdraft.
Understand what you’re up against
When I worked in banking, we would look at certain warning signals. If a product is excessively complex and extracts revenue that is exponentially higher than the cost of providing the service, then something is wrong.
I believe the overdraft market in the US is fundamentally broken, and has morphed into the worst type of predatory lending.
I have a really simple solution, and banks all over the world are already doing this.
Declining a transaction costs banks fractions of a cent, so charging consumers a $35 decline fee is obscene. The most they should charge is a few dollars. Some new entrants charge nothing at all – and they are right to do so.
An overdraft is a short-term loan. Lets stop talking about fees, and start talking about interest rates
Checking accounts should have a disclosed overdraft limit. In other words, you should know that you can go up to $500 overdraft
The bank should charge a fair interest rate for the money you borrow – and only for the days that you borrow the money
Some banks are reasonable when it comes to overdraft
First Direct, one of the most popular banks in the UK, offers the following:
Free overdraft protection up to $250
A line of credit above $250 (the better your credit score, the higher the available line). The interest rate is about 15%. You don’t pay a fee-only interest for the days that you use the credit line. So, if you borrow $100 for 7 days, you would pay about $0.29.
If you use your entire overdraft line, and the bank declines additional transaction, you pay nothing.
Banks should make money. This is not a charity. But they should offer transparent pricing that is easy to understand and compare. And the profit should be in line with the cost of providing the service.
Consumers should be able to compare and choose the best option – just like any other consumer product. Fortunately, we’re helping you do just that.
Banks that respect you and your money
Consider switching to an internet-only bank. I have made the switch.
If you have a few instances of going overdraft because of a simple mistake, then consider Ally Bank. You get one of the best interest rates on the market for your savings account. And, if you go overdraft, Ally DOES NOT CHARGE YOU for transferring money from your savings account to your checking account. Why you ask? Because, it doesn’t cost them anything to do it!
If you go overdraft because you need the money, then Capital One 360 might be right for you. This is the old ING Direct. They act a lot like First Direct of the UK: no overdraft transfer fee, a line of credit, and you only pay interest for the days that you are overdraft.
If you never want to go overdraft again – and wish the bank would just decline your transaction and not charge you a fee, then look into Bluebird or Serve (both from Amex). Bluebird is in partnership with Wal-Mart. You can never go overdraft, and you will never be charged an NSF fee.
Even if you love brick-and-mortar bank branches, do the math to see if switching to an internet-only bank could save you a substantial amount of money in fees – and don’t forget the cost of gas!
Want to know more about Internet banking? Check out this article.