7 TIPS for Avoiding Overdraft Fees

No matter how careful you are with your spending and calculations, or how meticulously you balance your checkbook, your bank statement may still show those annoying words: Overdraft fee. Here’s the scoop: Some banks have a secret when it comes to overdraft fees — and it can cost you big bucks. Here’s 7 tips on how it happens and what you can do to fight back.

1. First of all, some overdraft fees seem outrageously high! Is there a limit on what banks can charge? 

Nope! We surveyed a handful of banks and asked about their overdraft fees. Turns out, they range from $25 to $35 per bounced item. And that’s legal.

2. One time my bank hit me with four overdraft fees when I had money in my account! How did that happen?

Annoying, isn’t it? We found sometimes you may be charged more overdraft fees than really necessary. Here’s why: In order to hit you with more fees, banks are cashing your checks in the order they want to. They call it “check re-ordering.” As a result, consumer advocates warn, people are racking up huge penalties. And most have no idea it’s even happening.

3. Huh? How do banks do that?

One viewer who called us said his statement showed he had $1174.94 in his account and on one day he spent $200, $130, $80, and $1250. Okay — his bad – he went into the red. But instead of the bank okaying the little expenditures and rejecting the big one, in the order he wrote the checks — which would have been one overdraft fee of $35 — it reordered the debits and took out the big one first. That allowed the bank to charge him four overdraft fees, quadrupling his penalty to $140.

4. Is re-ordering the checks legal?

Yup. We found there are no rules for how banks must process checks. The law says as long as banks disclose their policies to you, they can charge overdraft fees and clear checks anyway they want.

5. What do you mean disclose it to me? I’ve never seen any signs at the bank admitting this!

It’s those little agreements you get handed when you open a checking account. (Did you read yours?) Sometimes they’ll send you amendment notices in the mail, written in font size 6. (Do you read those?) We found some “disclosures” say things like, “we reserve the right to change the order of payment without notice to you” and another, “the bank may post items presented against the account in any order the bank chooses.”

6. Wow. Do most banks do this?

We surveyed almost a dozen banks and found more than half admitted they pay the largest checks first. The American Bankers Association told us: “It’s a proprietary decision.” And they said, “Most customers want those big bills paid first because they’re more important.” The banks claim this is to your benefit, so for instance, your larger-sized rent check clears. But the banks are making the choice about which of your checks clears first, not you.

7. Is there anything I can do to avoid getting re-ordered and slammed with fees?

Well sure, keep a very careful eye on your spending and checking account. The American Bankers Association told us you can also shop around for a bank that doesn’t hit you with big overdraft fees. There’s a bill pending in Congress right now to stop this practice. If you feel strongly about it, call your lawmaker.

Award-winning investigative reporter Hank Phillippi Ryan is on the air at Boston’s NBC affiliate where she has broken big stories for the past 22 years. She has won 24 Emmys as well as dozens of other regional, national and international honors for her work. (www.hankphillippiryan.com). Mary Schwager is a journalist with more than 16 years of experience and is the investigative producer at 7 News. She’s won more than two dozen awards for investigative, consumer and feature reporting and writing, including nine Emmy Awards, seven Edward R. Murrow Awards and three Associated Press honors. She was also a state licensed detective and performed criminal investigations on behalf of the Wisconsin Public Defender’s Office. Find more of Mary’s articles at Examiner.com. Ryan and Schwager can be contacted at hryan@whdh.com and mschwager@whdh.com.