BEWARE THE DEBIT BITE

You might think you have plenty of money in your checking account, then you get a charge of $30 or so from your bank telling you that your account is overdrawn. Yes, it happens more than you’d think. Here’s what you need to know. Crunch some numbers along with me. It could prove enlightening. We’ll keep it as simple as possible. You start off on a Wednesday with $100 in your checking account. At 10:00 AM you deposit a check for $185 into your account. The check is a gift from your Uncle Toody who lives in Spokane. You now have $285 in your account. At noon, while on your lunch break, you buy $200 worth of clothing and pay for it with your debit card, thus reducing your balance to $85. Your lunch tab is $18, and you pay for that with your debit card, bringing your checking account balance to $67. Friday is payday and you’ll deposit your paycheck for $800 next Monday. Is everything okay? No. Far from it. The next day, Thursday, you get a notice from your bank that your account is overdrawn by $178! The bank gives you this explanation: “ We tally up all deposits and withdrawals (check and debit card charges) at the end of each day. We do not tally them in the order they came in. Rather, we tally them by amount----largest first. Thus, when you charged the clothing for $200, we debited your account by that amount, resulting in an overdraft of $100, plus a penalty charge of $30 for any overdraft, bringing your balance to minus $130. The overdraft charges are debited immediately. Then came your $18 lunch---this was another overdraft, so there’s another $30 penalty. In other words, your lunch cost $48---$18 for the lunch itself, and $30 for the penalty. So, adding that $48 to the prior overdraft amount of $130 leaves you with a negative $178 balance. Please deposit that amount into your account immediately or we’ll start adding further penalties for every day you remain in overdraft status.” “WAIT A MINUTE! What about the $185 check I deposited first thing in the morning? That would have brought my balance to $285, which would have more than covered the $200 clothing cost and the $18 lunch?” “Sorry, but that $185 was drawn on an out-of-town check, and we can’t give you credit for an out of town check until we’ve given it time to clear---three business days. So it didn’t count in your balance for that day. Now please pay up.” “That’s terrible. What if I deposited a check for $185 from, say, the United States Government, such as an IRS refund?” “Technically, we still could have waited one day for the check to clear, so it might not have helped. However, had you deposited $185 in cash, we could have credited it that same day and you could have avoided the whole problem, overdrafts and all. Of course, if we knew you better----well enough to be sure that you’d cover Uncle Toody’s check if it bounced---then we could have credited it to your account before we debited the charges, and you would have avoided the overdrafts. But we didn’t know you better. So you owe us $178. Now!” To be sure, this is a worst case scenario, but it happens all the time. A recent Congressional study showed that banks reap billions per year in overdraft charges---many of them perfectly legitimate, but a big chunk arising from this practice of tallying a day’s business as your bank had done. Not all banks tally that way---many tally the debits and credits in the order they’ve been received, rather than largest first and so on But if your bank does like the one in this story, you’re vulnerable. A bill is being introduced in Congress to protect consumers from such abuse, but until it becomes law (if ever) you have to take care of yourself. As a general rule---even if you’re a long-time customer of the bank---it’s wise to ask your teller at the time you make a deposit when an out-of-town check will have cleared and be credited to your account. Tally your ongoing balance accordingly. Some banks will bend the rules and cancel overdraft penalties if your account has been otherwise kept in good condition---that is, no overdrafts or bounced checks. In the case at hand, you certainly have nothing to lose by pleading your case with a sympathetic officer. Many do have the discretion to cancel charges, and you might also find that many are willing to do so because they also don’t think the debiting method is fair. This article supplements Chapter 11, pages 277-283 in Personal Finance. Access the textbook by clicking on the box in the right column.