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Updated on Monday, May 19, 2014
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, 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.