Beware of Overdraft Fees

I've bounced only one check in my life, when I forgot to record a rent payment in my check register. I was mortified. Fortunately, and much to my surprise, my bank, SunTrust (NYSE: STI  ) , paid the check, even though I didn't have the funds to cover it in my account. Upon being notified, I immediately went in and plumped up my account. I was aware of banks charging for overdraft services, but I hadn't signed up for any of that, and I don't think my bank charged me anything for the incident. Whew!

That was a few years ago, though, and times have changed. Our friends at the Consumer Federation of America (CFA) recently issued an interesting report, titled "Most Big Banks Level High 'Courtesy Overdraft' Loan Fees Without Consumers' Permission." Yikes.

It noted: "Over 80% of the nation's largest banks charge consumers high overdraft fees without their permission. . Consumers are only informed of these charges in the fine print of their account agreements, which can cause them to inadvertently overdraw their accounts when making an ATM or debit card transaction."

It then quoted CFA consumer protection director Jean Ann Fox: "A loophole in federal rules actually permits this deceptive and abusive practice." Eric Halperin, policy counsel at the Center for Responsible Lending, opined, "The Federal Reserve missed an opportunity to require banks to give customers information about the true cost of overdraft loans. As a result, banks can continue to hide the cost of these products."

More statistics: The CFA surveyed 33 banking institutions and found that at least 27 (82%) had courtesy overdraft policies in the fine print of account agreements. Says the report: "All of these banks allow depositors to overdraw their accounts at the ATM, 26 (78.8%) allow overdrafts at point-of-sale debit transactions at merchants, and 17 (51.5%) allow overdrafts from automated or scheduled electronic payments."

So what kind of fees are being charged for these "courtesy overdraft" services? Well, they average in the neighborhood of $27 to $29, with larger banks tending to charge more than smaller ones. Making matters worse, if the money isn't repaid promptly, many banks are charging more money. About half of the surveyed banks do so, with seven of 33 charging an average of $5.57 per day.

Reading about this, I found myself seeing two sides of the issue. On the one hand, I can't help agreeing with the CFA that banks could -- and should -- serve customers better by making their fee schedules and policies more prominent and clear. And to the extent that they are charging more than they should, they should cut that out.

But on the other hand, I don't see consumers as total innocents, either. It's not hard to understand that we shouldn't spend more than we have. (Of course, far too many people ignore this basic truth and end up mired in catastrophic credit card debt. If that describes you, we can help via our Credit Center.) When we bounce checks, it's often our own fault.

We should make sure we have the funds to cover the costs we incur. We should also shop for banks that will serve us best -- those that charge lower fees, perhaps, and/or those that offer higher interest rates. If you tend to bounce a lot of checks, seek out the bank with the lowest overdraft fees. If your priority is earning interest on a substantial account, focus on interest rates (but don't ignore fees).

Truth be told, even if you're trying to do the right thing, banks don't make it easy for you. When you write a check, your bank probably whisks that money out of your account as soon as it receives the check. If you make an electronic payment, your dollars probably suffer whiplash as they careen out of your account. But when you deposit dollars, these formerly fleet-footed funds suddenly drag their heels. It can take many days for the money to be added to your ledger. This doesn't seem quite fair to me.

Well, actually, it reminds me that perhaps I should look into banks as possible investments. After all, they're cleverly profiting by hanging onto our incoming funds for a little while, and from all of the fees they charge, too.

Learn more in these articles about banking prudently:

Finally, drop by our All About Banking center for more tips and guidance.

Hot Tip: Did you know that some brokerages offer checking and other banking services? Your brokerage may be a better bank to you than your current bank is. Learn more in our Broker Center.

LongtimeFoolcontributorSelena Maranjiandoes not own shares of any companies mentioned in this article.

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