The $38 Cheeseburger & other Banking horrors

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Rachel Gardner gets paid every two weeks. On payday – every other Friday – her paycheck is deposited directly into her bank account. She relies on her debit card for nearly everything, including fast food, gas, and shopping. As with many people, by the time payday rolls around again, there are just a few lonely dollars left in Rachel’s account.

Then one day disaster struck:

She checked her bank balance using her ATM card and found that there was $307 in the account. Just barely enough to cover her $302 car note, which was due to be debited from her account. This left only $5 of leeway, one day before payday. But that was enough, and besides, she was planning a weekend getaway to Mustang Island and Corpus Christi over the weekend.

What she didn’t know was that America Online was going to charge her $25 two days earlier than usual because of the Memorial Day weekend. This left her balance at $283 when the car note came in, giving her with a $19 negative balance.

The bank paid the car note, but charged Rachel a $35 fee, leaving her at minus $44. Her paycheck was deposited, but would not credit to her account until Tuesday, because Monday was a holiday. So until Tuesday, she unknowingly was operating with a negative balance.

Rachel made 3 purchases with her debit card on her way out of town – gas, ice, and supplies. She also went online and paid for her motel room with the same debit card. While she was online, she went to i-Tunes and bought 9 songs at 99¢ each to put on her iPod and listen to during the drive. Each song was a separate transaction – that’s the way it works.

In Corpus, Rachel ate at several places, ran a couple of bar tabs, bought souvenirs, more gas, and did some light shopping. By Monday morning she had spent a total of just over $350 on 27 separate transactions. She figured that with a balance of $5, plus her $1100 paycheck, she would still have over $700 in her account. Instead, she discovered on Tuesday that she was overdrawn by about $90. Frantic, she went online to look at her account, and discovered that her balance had been negative for several days, and that 22 of the 27 transactions had already been submitted to her bank – which paid them, then charged a $35 overdraft fee on each one, including each of the iTunes. That’s $35.99 per song! Now Rachel was dead broke two weeks before payday, and overdrawn at her bank. Calls to customer service were getting her nowhere. Bank employees, while sympathetic to her situation, blamed the computerized system. They said they were unable to waive the fees.

Rachel got mad, called Representative Craig Eiland in Galveston, and discovered that the bank was not breaking any laws. She went to the bank and spoke with the branch manager, who was unhelpful – until she burst into tears in his crowded lobby. He finally agreed to waive half of the fees, which was $350. In the meantime, the other 5 transactions had come in, adding another $175 in fees. So she ended up paying her bank a total of $525 in fees she couldn’t afford.

I’d like to name the bank, which is in League City – because their behavior in this case is deplorable. I’m not afraid to
name the bank. Our regular readers know we are not afraid to name names. I had every intention of naming the bank and putting them to shame in print for the way they treated this customer of theirs. But I won’t do it because I found out that nearly every bank does the exact same thing as often as they can to generate fees. It’s standard operating procedure – particularly at the larger corporate banks. The best thing I can do is advise our readers how to avoid this kind of mess:
1. Be aware of your bank’s “hold” policy on deposits – make sure you know when a deposit will be credited.
2. Keep a few extra dollars in there for surprises like the AOL charge Rachel experienced.
3. Instead of making a large number of ATM transactions, withdraw some cash and use it for small purchases.
4. Consider opening an account with a locally-owned bank or credit union – they tend to be more flexible.
5. Realize that no matter how nice the people in the lobby are when they greet you by name, they are running a business. You’re already getting free checking, and they have to generate a profit somehow.

6. Understand how this “courtesy overdraft protection” works. You should know that whenever multiple transactions are coming out of your account on the same day, the bank is not going to pay the ones that will clear and reject the ones that won’t – most banks process the largest transactions first. If there is not enough money in your account, they will pay it as a “courtesy” and charge a fee of $35. They say they pay the largest debits first to ensure that your “important” bills get paid – but this is not true – because they also pay the smaller ones, again as a “courtesy”, and again, charging $35 every time. The true reason many banks start with the largest transaction is to maximize fees.

Some people will say that it’s your own responsibility to keep track of your money, and banks shouldn’t be to blame. That sounds fair enough, but by the same token, banks sometimes seem unable to tell you how much money is in your account.

You could conceivably call their hotline for your balance, then go online, then check it at an ATM, and then call the bookkeeping department and get 4 different answers. This makes it hard to really know where you stand – especially in these days of internet transactions, pay-at-the-pump gas, and convenient ATMs located in every business.

Congresswoman Carolyn Maloney of New York has introduced a bill that would change the way banks treat overdrafts.

Maloney likes to cite the case of a constituent who bought a hamburger that wound up costing him $38. She says that when banks issue debit cards, then pay overdraft items (and charge a fee), they are – in effect – turning a debit card into a credit card. They are extending credit through what is euphemistically called “courtesy overdraft protection”. Maloney wants banks to stop extending this form of credit to people who didn’t ask for it or apply for it. She says the cost of this courtesy loan is higher than the cost of any other form of borrowing, including payday loans, and says banks don’t disclose the true costs or even how much of their income is generated by this type of credit. Maloney wants banks who are going to offer this service treat it like credit – which would require full disclosure and make it optional. The banking industry claims these charges are not loans, but fees. But the banks report the fees as loan income when they make filings with the FDIC and other agencies. Uncollected fees are charged off by banks as uncollected loans. So in practice, the industry is tacitly admitting that the courtesy overdraft protection actually is a form of credit.

Later this summer, the US House of Representatives will be considering Maloney’s bill.

In Rachel’s case, if the bank had refused the $302 car note (after all, there were insufficient funds – isn’t that what they’re supposed to do?), all of her other transactions would have cleared over the weekend, and she would have paid only one $35 fee – saving her about $500. She asked her bank if she could opt out of the courtesy overdraft protection, and was told no. She went to another bank to open an account and found they had the same practice there as well.
Nothing is free, they say. Free checking is a great marvel of the 21st century. But please be aware of what is happening with your account, or you may pay hundreds of dollars for the privilege..