Squeezed by Bank Fees — Still

New rules protect you from some charges.

by: Ron Burley | from: AARP The Magazine | Nov./Dec. 2010 issue

For Michael and Amy Hines of Denver, financial disaster began with the electronic payment of a utility bill. "When I saw our other pending payments, I realized that we’d be overdrawn," Michael says. "I called the bank to try and stop it, but they said it was too late."

The Hineses had what's called overdraft coverage. This standard policy of most banks allows customers to keep drawing funds —for a fee, of course—when their checking accounts dip below zero. But U.S. Bank bounced the payment anyway, imposing a $35 penalty that helped push the balance into the red. Unbeknown to many consumers, overdraft coverage leaves banks free to bounce checks. (Overdraft protection — see below — makes that less likely.) Soon the bank began charging $8 for every day the account was overdrawn. The fees had reached $150 — a blow to the Hineses, who live on $1,300 a month — when a friend, Michael Myers, covered the deficit. The Hineses had paid the utility directly, but then the fees started again when somehow the automated bill was resubmitted.

Banks will earn $35.2 billion this year by penalizing customers in the red, says Moebs Services, a research firm. Though a new federal rule curbs overdraft coverage for ATM- and debit-card transactions — banks must now ask you to enroll in this service — consumers are still vulnerable to cascading charges on checks and online payments.

After Myers wrote to On Your Side, I contacted U.S. Bank, which reversed $360 in charges to the Hineses, though not the initial ones. So Myers is still out $150.

The best way for you to avoid such problems: When your bank asks you to sign up for overdraft coverage, don't take the bait. And ask that it not honor overdrawn bill payments, either; some banks will cooperate (and if yours doesn't, try a different bank). If an online payment does overdraw your account, settle up with the biller right away to prevent multiple bounce fees.

Ron Burley is the author of Unscrewed: The Consumer's Guide to Getting What You Paid For.

How to Defeat the Overdraft Trap

You can avoid overdraft fees if you link a savings account or credit line at the bank to your checking account. That way funds can be transferred, as needed, for a small fee that's usually less than an insufficient-funds charge. Some banks call this overdraft protection rather than coverage.

New overdraft rules
As of this past Aug. 15, all bank customers who want "overdraft coverage" on their single debit card purchases or ATM withdrawals need to opt in through their banks. If you don't opt in, these transactions may be declined as a result of insufficient funds. However, at least you won’t be charged a fee, which can run $35 or more.

Written checks and automatic bill payments are excluded from these new rules, which only pertain to single debit-card purchases and ATM withdrawals. If a check or automatic bill payment exceeds the account balance, it’s at the discretion of the bank whether to pay (and impose a fee) or deny the transaction (and impose a fee).

An alternative offered by some banks, sometimes called "overdraft protection," is to link a checking account to a savings or other account. Linking allows the bank to automatically transfer funds between accounts, as needed, for a nominal fee that’s generally less than an insufficient-funds charge.

You may also be able to get e-mail or text message alerts if your account drops below a certain minimum balance. Ask a representative at your bank.