Banks love to talk about how easy it is to do online banking, such as depositing checks via a smartphone app. But did you know that if you want to see how much is really in your bank account, you still need to balance your checkbook? Your bank’s app not only might give you bum information, you might get whacked with an overdraft fee of $35 or so for insufficient funds if the amount in your account is less than what the app says. (In a moment, I’ll offer some advice on how to steer clear of overdraft fees.)
A recent smart and revealing post by Forbes reporter Lauren Gensler calls this “the online trap.”
Getting Whipsawed by Overdraft Fees
In her piece, Gensler explores a few crafty banking practices I didn’t realize existed. She shows just how easy it is for online banking customers to get whipsawed by overdraft fees.
I naively thought the amount my balance showing up when I logged on via my smartphone or computer was in real time. Not so.
Consumers need to understand that the balance you see is not necessarily your actual available balance.
— Mark Ranta, ACI Worldwide
Turns out, Gensler says, a 2015 study from the Pew Charitable Trusts found that roughly half of banks intentionally reorder customer transactions — rearranging payments by processing them from the largest to the smallest. That lets them maximize their overdraft fees because they can process the biggest check you wrote before smaller ones before it and your account might not cover the larger check.
“Consumers need to understand that the balance you see is not necessarily your actual available balance, because there are so many moving parts,” Mark Ranta, head of digital banking solutions at ACI Worldwide, which provides payments systems for financial institutions, told Gensler.
This is troubling. And if you rely on your bank app’s balance to determine whether you have enough to buy something with your debit card, you could be in for a nasty surprise.
The Expensive Pack of Gum
There’s more: Did you know that if you go to the gas station and buy a pack of gum, a $50 hold might be put on your account? That’s because the gas station is reserving enough against your account to fuel up an SUV, according to Gensler’s reporting.
Her article notes that confusion over available balance is the top complaint of consumers regarding overdraft fees, according to the Center for Responsible Lending.
I recommend you read Gensler’s entire piece, but you get the gist of it: You can check your bank account balance online and when you go to use your debit card a few hours later, it might be declined for insufficient funds. Worse, if your bank doesn’t put the kibosh on the transaction, you’ll be hit with an overdraft fee.
6 Tips to Avoid Overdraft Fees
Here are six tips to avoid overdraft fees on bank checking accounts:
1. Look for your “Available Balance.” Greg McBride, chief financial analyst at Bankrate.com, says: “When checking your balance online or on your phone, focus specifically on the ‘Available Balance.’ This won’t count deposits where there is a hold on the money, for instance.”
2. Link your checking account to your savings account. This way, in the event of an overdraft, it’s your money rather than the bank’s money that covers the shortfall,” says McBride.
Many banks offer an overdraft transfer service, which provides this kind of link. Then, when a transaction would result in a negative balance, the bank processes the transaction and transfers funds from the linked account to prevent an overdraft.
Many banks offer free overdraft transfers from savings accounts, says Ken Tumin, founder of DepositAccounts.com. For those that do charge, the median fee among 40 banks offering this service is $10 — far cheaper than overdraft penalties, according to Pew.
3. Sign up for email or text alerts from your bank. By doing so, you’ll know when your balance gets below a certain level. “This gives you a heads-up so you can transfer money into the account, or hold off on transactions that would overdraw the account,” McBride advises.
4. Keep more money in checking. Interest rates are so low these days that the difference between what your savings and checking accounts earn is nominal.
5. Set up your bank CDs to automatically pay their interest into your checking or savings account. Most banks will let you do that. Tumin says this can help you maintain a bigger cash cushion to cover an occasional overdraft.
6. Finally, consider opting out of overdraft protection. If you do this and you don’t have enough money in your account, your transaction will be denied. Then, you won’t be slapped with an overdraft fee. In 2010, a federal law made opting out the default, but your bank may suggest you opt in as a “consumer service.”