Tag: OVERDRAFT

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4 Sneaky Ways That Banks Can Trick You, According to a Former Banker

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

4 Sneaky Ways That Banks Can Trick You

When you work in banking for nearly 15 years, the way MagnifyMoney co-founder Nick Clements did, you come away with what can only be described as an insider’s knowledge of the ins and outs of the business. Clements certainly did, including some of the sneaky ways that big banks trick us into spending our money.

Here are the four big ones that Clements suggests consumers be on the lookout for.

1. Retroactive Interest

Unless you’ve been living under a rock the past couple of months, you’ve probably become familiar with the “free 0% financing!” offers that tend to be pushed pretty aggressively by retailers and credit card companies during the holidays. If you’re not careful, though, those 0% offers could end up costing you a pretty penny in the form of deferred interest. What happens with this type of card is that interest for purchases made on it will be set at 0% for a certain number of months. If you can pay your card off in full at the end of that time period, great — you’ve made the most of the offer. If you carry over a balance, however, interest will then be retroactively charged at the standard purchase rate, which tends to be much higher than average on these types of cards. Check out this piece for more about deferred interest and how to avoid it.

2. Re-ordering transactions

If you have overdraft protection on your account, this sneaky little trick could really sting you, and nearly half of banks still do this, says Clements. What happens is that banks will reorder your transactions throughout a day to maximize the number of times that you pay overdraft fees. Consider this example: You start the day with $50 in your account. You then make three withdrawals throughout the day, the first at 10 a.m. for $20, the second at 1 p.m. for $20 and the third at 7 p.m. for $40. In this particular scenario, you should have only overdrawn on your account at the third transaction, right? The trick happens when your bank reorders your withdrawals so that the $40 happens first, then a $20 and then the final $20. In this case you would have actually overdrawn twice. This sneaky little move is surprisingly legal, and incredibly unfair. For more on how to eliminate overdraft fees, check out this piece.

3. More overdraft woes

Besides what’s mentioned above, another issue can come up with overdraft protection when you try linking your credit card to your checking account. In doing so you may inadvertently get charged two fees right away when you overdraw — the first being an overdraft transfer fee from your checking account and the second being a cash advance fee on the credit card. If that’s not enough, the balance on the credit card is then treated as a cash advance, says Clements, which means there’s no grace period and interest begins to accrue right away, and at a much higher rate.

4. Grace period problem

In most cases, the simple act of completing a balance transfer onto a new credit card will cause the consumer to lose their grace period on purchases. The only time this isn’t usually the case is when a specific 0% offer for purchases has been made for the card. Use this tool to help compare different balance transfer options on different cards.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Cheryl Lock
Cheryl Lock |

Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at [email protected]

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Banks Generate $30bn Of Abusive Overdraft Fees

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Banks generated $7.65 billion of overdraft revenue during the first three months of 2015, according to the Wall Street Journal. On an annualized basis, banks are poised to generate $30.6 billion in overdraft revenue this year. Despite the passage of Regulation E, multiple lawsuits and the threat of regulation from the Consumer Financial Protection Bureau (“CFPB”), fees have only reduced by 4% compared to 2014. Overdraft fees have historically accounted for an outsized percentage of checking account revenue at the largest banks in the country, and it looks like these fees will remain a meaningful contributor to revenue in the near future.

Are Overdraft Fees Predatory?

The average overdraft fee is about $30 per incident. In addition, many banks charge extended overdraft fees. At some banks, it can cost $70 to borrow $6 for six days as a result of the extended overdraft fee. Even worse, nearly 50% of banks in the country will re-order transactions to increase the number and amount of overdraft fees charged. Rather than debiting money from your checking account in the order that the debits occurred, banks often debit your account in the order that they wished the transactions would have occurred.

Because overdrafts are so expensive, the vast majority of people avoid them. In Europe, an overdraft line of credit is a cash management product that makes sense for everyone. Keeping too much cash is expensive, because it could be better invested or placed into a long-term certificate of deposit. People of all economic backgrounds take advantage of generous overdraft lines of credit, which charge very low interest rates. Borrowing $6 for six days would only cost a few pennies in most large European banks.

However, American banks have made going overdraft a sin and high overdraft fees the punishment. As a result, people with money have completely avoided overdrafts. Only a small percentage of the population uses the overdraft product. 8% of bank customers generate 75% of overdraft fees. Overdrafts have become a short-term borrowing mechanism for people who have no other option. And overdrafts offered by banks are often more expensive than payday lenders. The typical payday lender charges $15 to borrow $100 for 2 weeks. As I mentioned in the Bank of America example, large banks are charging much more than that.

A banking practice is considered predatory when it meets a few definitions:

  • It targets people with low income or limited financial means
  • It charges a price that is dramatically higher than the cost of providing the service
  • It has opaque and complicated pricing that makes it difficult to understand the true cost of the product
  • It charges the fee when someone is in a vulnerable position and has few alternatives

Overdraft fees meet all of those requirements. The price of an overdraft is dramatically higher than the cost of providing the service. Banks charge an average of $30 to decline a transaction, which costs the bank close to nothing. When banks approve a transaction, credit risk is taken. However, the banks are charging effective interest rates above 400% in the form of fees. The banks are addicted to the revenue, which is why the revenue remains despite the backlash.

As overdrafts become more expensive, fewer people will use the service. Banks will extract more revenue from people who have fewer funds and a lower net worth. In my opinion, overdrafts are predatory and action is required.

Isn’t The Situation Improving?

Most headlines have reported the reduction in overdraft fees. And a 4% reduction is material. This reduction has come from banks eliminating high-to-low transaction ordering and putting limits on the number of overdraft fees that can be charged per day. At many banks, it used to be unlimited.

However, banks have not reduced the headline rate. Bank of America has been bragging about its commitment to the customer. But lets look at what they have really done:

  • The overdraft fee remains $35 per incident, and 4 incidents can happen each day
  • The extended overdraft fee remains in effect, charging $35 after 5 days
  • The bank eliminated the option to opt in to debit card and ATM overdraft fees. However, very few people are opting in to this service

In short, the changes have been cosmetic. And without rules from the CFPB or competitive pressure, I doubt the policy will change. The poorest Americans will continue to find Bank of America more expensive than most payday lenders.

What Alternatives Exist

I personally do not like doing business with institutions that create intricate webs of “gotcha” fees. That is why I switched to Ally Bank, which has virtually eliminated overdraft fees from its product offering. Most internet banks have done the same thing, and you can compare accounts here.

Unfortunately, if you need a branch, most branch-based banks remain expensive. And most credit unions are not far behind, charging $25 when the big banks are charging $30. Community banks, credit unions and large banks are all getting fat from these fees. Despite the regulatory pressure, lawsuits and negative press, our nation’s poorest will give banks another $30 billion of overdraft fees this year.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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Regions Bank Fined $7.5 Million For Overdraft Abuse

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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This week, the Consumer Financial Protection Bureau (“CFPB”) fined Regions Bank $7.5 million for unlawful overdraft practices. In addition to the fine, Regions Bank has refunded approximately $49 million of fees to customers. Regions Bank is based in Alabama and has more than $119 billion in assets, making it one of the largest banks in the country.

Regions Bank was fined because it failed to receive the necessary opt-in from consumers, delayed fixing the problem for a year and mis-represented certain fees to its consumers. The CFPB has been looking closely at the overdraft practices of banks. Director Cordray has made it clear that he is not a fan of the way banks treat overdrafts, and bigger reforms are expected later this year. In the interim, we can expect more fines of banks that are violating existing rules and guidelines.

Regions Bank earned $218 million during the first three months of 2015. The CFPB fine does not represent a significant portion of the bank’s earnings.

Abusive Overdraft Practices

Overdrafts in the United States are incredibly expensive for consumers, and unimaginably lucrative for banks. During 2014, banks generated over $30 billion of overdraft fees. When you look at how banks charge overdraft fees, you can see how easy it is for banks to generate so much revenue.

If you make a transaction in your checking account without having sufficient funds in your account to cover the transaction, you are at risk of being charged an overdraft fee. Imagine you have $100 in your bank account, and you try to write a check for $120. The bank has two choices: it can approve the transaction, or decline the transaction. If the bank declines the transaction, it will charge a non-sufficient funds (“NSF”) fee. The average NSF fee is $35. If the bank approves the transaction, it will allow the account balance to go negative. In effect, the bank gives you a loan. Banks charge, on average, $35 for an approved overdraft. So, you will pay $35 if you are approved, and $35 if you are declined.

Even worse, most banks have an extended overdraft fee. For example, Bank of America will charge an additional $35 if you do not bring your balance positive within 5 business days. Some banks even have a per day charge.

Some banks offer “overdraft protection.” That means you can link your checking account to a savings account or credit card. If you spend money that is not available in your checking account, the bank will sweep the money from the linked savings or checking account. However, most banks will charge a transfer fee, which averages $10. Given that most savings accounts only pay 0.01%, you would need to have $100,000 in your savings account in order to earn $10 in one year.

Even worse, if you link your credit card for overdraft protection, the sweep will be treated as a cash advance on your credit card. In most cases, that means you would be subject to an additional cash advance fee and interest would stat accumulating immediately at high double-digit rates.

As if the overdraft process wasn’t complicated enough, many banks reorder transactions to increase the overdraft fees. According to Pew, nearly 50% of banks engage in high-to-low transaction processing. Imagine you have a balance of $100. You make a purchase at 9AM for $10 (your new balance is $90). At 10AM you make another purchase for $10 (and your new balance is now $80). And then at 1PM you make a purchase for $100. The last transaction would cause you to go overdraft, resulting in a $35 charge.

50% of banks would reorder the charges, from highest to lowest. In this example, they would process the $100 transaction first, reducing your balance to $0. The other two charges would each cause the account to go overdraft. As a result, your fee would be $70 instead of $35. And that is all perfectly legal.

Consumer Protection

You do have certain rights. You can opt out of overdraft protection for ATM and debit card transactions. That means that if you use your debit card to make a purchase, and there is not sufficient money in the account, the transaction would be declined and you would not have to pay an overdraft or NSF fee.

However, you cannot protect yourself against checks and other electronic (bill pay) or recurring transactions.

Are There Cheaper Options?

Overdrafts can be incredibly expensive. The best way to avoid high cost overdraft protection fees is to consider an internet-only, branch-free bank. Many of the new start-up banks charge no overdraft fees and offer free overdraft protection from linked savings accounts. You can see some of these new providers here.

If you do not want to switch banks, you should consider opting out of overdraft protection, which will protect you from high fees on debit and ATM charges. You should consider linking your savings account or credit card, because the charges would still be less than standard overdraft fees. Finally, you should consider taking advantage of balance alerts to ensure that you are on top of your balance.

However, many people go overdraft because they have a short-term borrowing need. You should consider opening a low interest rate line of credit with your local credit union, or a personal loan from a marketplace lender. Credit unions and marketplace lenders offer significantly lower interest rates.

 

 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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