Tom Smith had $109.99 left in his Bank of America checking account. On a Monday, he made two separate debit-card purchases—$10 and $72—leaving a balance of $27.99. The next day he made a debit-card purchase of $180.50, which earned him a $35 overdraft fee. The bank later hit him with another $70 in overdraft fees for the two smaller transactions, even though they were made first, when his bank account had enough money to cover them. Eventually, the bank gave him back $105, but not before he took his complaints all the way up the corporate ladder to the customer advocate in the CEO’s office. His is the rare success story.
The names have been changed to protect consumers from banks that act capriciously, but stories of outrageous bank fees sadly have become commonplace. Getting those fees removed depends on how willing you are to pursue the matter, and even then, results are mixed at best. All of the major banks play by similar rules, which makes it easy for them to run up fees.
Take Mary and Ted Jones, for example. Mary says the couple checked the balance of their SunTrust checking account to make sure that it was in the black and then used their debit card to purchase a pack of gum and pay for time on a parking meter. A few days later, Mary made another purchase. When she checked her account, she found nearly $400 in overdraft fees.
What happened? Mary had made a previous large purchase that the bank hadn’t yet subtracted from the couple’s account when they checked it. Each subsequent small purchase that they made caused the account to be overdrawn, and each incurred a $36 overdraft fee. In the end, even after they negotiated with the bank, the couple wound up having to pay $200 for a few dollars’ worth of charges. Some break!
New federal rules that take effect this month could reduce some of the problems that are associated with overdraft charges, but they do nothing to eliminate the most deplorable fees. This lack of protection all too often leaves consumers holding the bag.
When we asked major banks to defend their fee policies, they either didn’t respond or dodged the question: Citibank and Chase each noted unhelpfully that consumers can bank without incurring fees.
FEELING AN OVERDRAFT. Of all of the kinds of seemingly endless fees that banks charge (See “One Thing that You Can Bank on Is Fees"), perhaps the most egregious is the overdraft fee. Overdraft fees occur when you make a purchase that puts your account into a negative balance, and they’re a gold mine for banks. Center for Responsible Lending (CRL), which is a nonprofit organization that works to eliminate abusive financial practices, estimates that in 2008 consumers shelled out $23.7 billion in overdraft fees, which was a 35 percent increase from 2006.
Overdraft fees, CRL says, account for as much as 50 percent of banks’ and credit unions’ fee income. Based on Federal Deposit Insurance Corp. data from 2005 to 2007, CRL figured that 50 million consumers had overdrawn checking accounts and that 27 million of them had incurred five or more overdraft or insufficient-funds fees annually.
As our earlier examples show, these fees can be highly disproportionate to the amounts of the overdrafts. The practice isn’t criminal, but it is reprehensible. In January, the consumer advocacy group Consumer Federation of America (CFA) examined the fees that are charged by 15 major banks. It found that overdraft fees ranged from $19 (U.S. Bank) to $39 (Citizens Bank). Eight banks charged a flat overdraft fee. Seven charged tiered fees, which means that after the first fee, say, $25, the second through fourth overdrafts might cost you $35 each and subsequent overdrafts might cost $37.50 each time.