Overdraft Protection Will Cost You

Overdraft protection, a service offered by many banks as a convenience, kicks in when a bank approves a transaction and the customer doesn't have enough funds to cover the cost. The bank allows the transaction to go through, like a temporary loan, and then charges the customer a fee somewhere in the range of $25 to $35, regardless of how much the transaction was.

As many unsuspecting consumers have discovered, the convenience factor comes at a cost. One reader wrote that he had deposited a check for several thousand dollars in his bank account. Unbeknownst to him, however, the bank did not release the funds for several days. During that time, he assumed he had funds in his account, and used his debit card for a number of minor transactions – groceries, gasoline, movie tickets, prescription medications. Every transaction racked up an overdraft fee of $35. "That's $140 just in fees… and none of my purchases was over $35," he wrote.

According to a CNN Money article, debit card transactions account for nearly half of all overdrafts, with most of these transactions averaging far less than the overdraft fee itself. And if you don't repay your overdraft within a few days, some banks charge additional fees. The Center for Responsible Lending states that financial institutions "manipulate the order in which they clear deposits and withdrawals in order to maximize overdrafts," and estimates that Americans now pay $17.5 billion each year in fees for abusive overdraft loans, more than the $15.8 billion total paid out to cover those loans.

It's an issue that Congress has decided to act upon. Rep. Carolyn Maloney (D-NY), who introduced the "Credit Cardholders' Bill of Rights Act of 2008" (H.R. 5244), and Rep. Barney Frank (D-Mass.) are trying to protect consumers from such hefty fees with a new proposal: the Consumer Overdraft Protection Fair Practices Act (H.R. 946).

"I've been working on reducing sky-high overdraft fees for several years now," Congresswoman Maloney wrote to CNN Money.com. "Overdraft loans can be useful financial tools, but many consumers are being enrolled in costly overdraft protection programs without their consent." The legislation would require that consumers would have to "opt in" to overdraft protection programs, and banks would not only have to inform consumers when they are about to overdraw their accounts and allow them to cancel the transaction, but also would have to provide full, written disclosure of the overdraft policies to consumers.

But with banks countering massive losses in their mortgage portfolios with revenue-generating practices such as exorbitant overdraft fees, anytime rate hikes, universal default, and reducing the window between the time a bill is mailed and the payment due date, your Credit Mama is guessing that such a move will meet with great resistance by the banking industry lobbyists.

You May "Discover" New Fees in Your Credit Card Bills

Discover is introducing another way to enforce fiscal responsibility – or, as others may see it, another way to collect additional fees from its customers.

Beginning May 1, Discover will penalize its card holders for exceeding their credit limit twice by imposing the "penalty interest rate" (which, not surprisingly, is being raised from 29% to 31%). This action is in addition to the $39 over-the-limit fee Discover already charges.

Discover is not the only card issuer that is instituting rate increases for exceeding credit lines – Chase and Bank of America are including similar clauses in their member agreements.

According to calculations by The Red Tape Chronicles, affected customers will pay heavily for going over their limit:

A consumer with a $10,000 balance and a 15 percent interest rate who pays the minimum payment each month would pay $2,800 in a year and still owe $8,598 on that balance.

A consumer with a $10,000 balance and a 31 percent interest rate who pays the minimum payment each month would pay $4,047 in a year and still owe $8,891.54 on that balance.

If you are a regular user of credit cards, you should know that credit card issuers generally allow you to exceed your credit limit by 10 percent or more without warning. Credit card companies say they do this to prevent embarrassment or inconvenience in the check-out line. But with these stiff new penalties in place, you will pay for years for the privilege of using more credit than you have.

To maximize your credit score, you should not be charging more than 10 percent of your credit limit anyway, because of the negative impact of a debt utilization ratio. Know your credit limit. Stay below 50 percent of your limit (10 percent if possible). And if your credit card company offers e-mail warnings to let you know that you are approaching your credit limit, sign up today.

Bank Fees Go Up As Interest Rates Go Down

In a recent study conducted by the Government Accountability Office, an interesting trend was discovered. Over the past six years, as interest rates set by the Federal Reserve decreased, the amount of fees charged by banks increased. The report suggests that because banks don't make as much money on interest rate 'spreads' they try to generate revenue by raising fees.

These fees include overdraft fees, increases in credit card interest rates with no apparent explanation, ATM fees, and fees associated with changes to account status.

By law, fee schedules are supposed to be "clearly and conspicuously posted" at every bank. Those that don't are in violation of the 1991 Truth in Savings Act and Federal Reserve Regulation DD. Yet in 22% of the visits that GAO surveyors made to banks across the country, they were unable to find the fee schedules. One-third of banks had no information at all on overdraft fees and policies. More than half had no fee information on their Web sites.

One would imagine that being in violation of a federal law should yield some fairly stiff penalties. But not surprisingly, the consequences suffered by banks has been minimal. In fact, there have been just two times when regulators took formal enforcement actions. And consumers have no recourse except to file a complaint with regulators - which are generally ignored.

Meanwhile, bank fees are up 11% since 2000. The GAO study reported that last year banks grabbed $36 million out of depositors' accounts in fees, accounting for 27% of banks "non-interest income." Lack of fee information hinders consumers who try to comparison shop between banks.

While some attribute the fees to poor banking by consumers, the truth is that banks collect far more than just overdraft fees. And policies regarding when banks post deposits vs. when they deduct charges has impacted thousands of banking customers.

"The due date on my Bank of America credit card was on a Sunday. I paid the balance in full on the preceeding Friday in the 4:00 hour at BOA. BOA charged me a $40 late fee ... for paying two days early. Apparently, in the world of banking reality, anything paid after 4:00 counts on the next business day, which in my case was Monday. If I hadn't have been paying attention, taken the time from my schedule to go to the bank and complain, BOA would have stolen $40 from me. And the really sad part was that the bank stood by their practice. I told the bank manager that if BOA wanted the bill paid by 4:00 Friday, then put BY 4:00 FRIDAY on the bill. Then, he had the gall to ask me if I wanted to open an account with them. All I could do was walk off." (Texas consumer)

"What concerns me about banks the most, is their practice of re-organizing transaction amounts from greatest to least (AKA posting highest to lowest). This practice maximizes the instances of overdraft fees. How is it legal for banks to post transactions outside of the order they are authorized? A ledger showing one instance deserving a $35 overdraft fee results in a bank statement boasting $300 in overdraft fees made possible by this method of organzing posts. I am very committed to bringing federal attention to this unethical banking practice." (Vanessa, South Carolina)

Then there is the issue of "holds." Using your debit card can screw you up even if you do keep a detailed register of your account. One example: gas stations can place a hold on funds when you use your card at the pump. Some hold $1 just to make sure its a valid account, some hold $50 or more and release the hold when they process the actual amount you spent. These holds may cause your bank account to go into the red, even if there is money in the account.

Other fees include changes imposed on long-standing accounts without disclosure to the consumer:

"Years prior, I had set up two IRA bank CD accounts with MBNA whereby there were no fees, just like a non-IRA CD account. However, after the merge with Bank of America, suddenly an annual $30 maintenance fee is applied to each account. I called BofA to complain and found that I am now stuck with these fees. I cannot transfer these IRAs to another bank (without penalty) until the CDs mature." (KW in Las Vegas)

"I signed up for a free checking account at my local bank a number of years ago. After I refinanced my home and took out $50K in equity, I deposited this into my free checking account, I then began to spend this equity on home improvements to my house. Without my knowledge the bank changed my account type to one that provided free checking for accounts with balances in excess of $20K. As soon as my account balance went below the $20K amount, they started taking $20.00 a month as the fee for this account. Shame on me that I didn't catch it
until the end of the year, which was 10 months and $200.00 later. I went down to the bank and had the account switched back. The bank played stupid, wouldn't refund the money and wouldn't even pretend to investigate who had changed the account." (Bob, Massachusetts)

"Just last week my bank sent me a notice advising me that my interest rate on my bank credit card has risen from 20% to 25% with no justification what so ever. My credit is outstanding, my accounts are on point and I have never been late on a payment or switched any of my previous accounts." (Anonymous)

To all the people who just say 'don't overdraft your account and you won't get fees' - it's not that simple. Most banks have a policy of posting withdrawals before posting deposits - meaning if you deposit a check in the morning and write a check in the afternoon - at midnight when the bank posts the transactions, they will post the withdrawal first, even though the money should have been there.

Banks are for profit entities, and their primary existence is to maximize profits for their share holders. Credit unions are not-for-profits whose primary mission is to offer the lowest loan rates and fess and the highest savings rates to its member owners. If you are frustrated or overwhelmed by the fees charged by national banks, you may want to investigate switching to a local bank or credit union.