You probably think of your bank as a place to stash your money, and it’s easy to forget that the bank is only happy to take it because they can use it to make more money. Mostly they do this by using your deposits to make profitable investments, paying you a tiny interest rate for the privilege. But that’s not the only way they profit, and a bank will screw you over in a flash if you let it happen. Here’s what to watch out for to avoid getting ripped off by your bank.
“Courtesy Pay”
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Sometimes your bank will send you a nice letter informing you that they have added “courtesy pay” or “overdraft tolerance” to your account. This means that if your account winds up overdrawn for some reason, instead of declining new transactions, the bank will cover them for you, thus sparing your the embarrassment of having your debit card declined in the grocery store or your rent check bouncing because your paycheck came up short.
Sounds nice, right? Except the bank doesn’t do this for free: It will charge you a fee for each separate transaction after your account is overdrawn, ranging from $10 to $40, depending on your bank. If you’re unaware that your account is overdrawn, you can easily rack up hundreds of dollars in fees that you would have avoided if your card was declined the first time you tried to use it. Overdraft protections can be a lifesaver, but you need to be aware of the repercussions.
Re-ordering transactions
Speaking of overdraft fees, did you know your bank has a lot of discretion on how to “order” the transactions it processes? And that some banks absolutely will process your debits first if you’re overdrawn—even if you have a fat deposit in the queue that would put your account back in the black? Or, if you have a series of debits, it might choose to process the largest first, putting your account into overdraft sooner, and thus racking up a few extra fees. There are several lawsuits in the works targeting this practice, so it might be going away. But until it does, be aware of how your bank operates.
Encouraging debit use
Banks happily give you a debit card to access your funds, and often encourage its use in their advertising. And it’s true, paying for things with your debit card instead of a credit card can keep you from running up debt. But using your debit card out in the wild can also expose you to damaging fraud. Put simply, the protections around credit card fraud are a lot stronger than those around debit card fraud. And if your debit card is compromised, you can be left on the hook for a lot more financial loss than if you paid via credit.
Bait and switch rates
Banks often advertise high interest rates for savings accounts and low interest rates for loans, but these are almost always the top or bottom of the range, rather than a guaranteed rate. Once you’re sitting across from someone in the bank, you will often discover that this compelling rate is not, in fact, available to you, leaving you with the choice of walking away from a loan or account or gritting your teeth and taking the bait-and-switch offer.
Delaying deposits
Your bank has some discretion regarding when deposits will be made available in your account. While generally speaking your bank will make deposited funds available to you within a business day or so, it can delay releasing those funds for a wide variety of reasons. Your bank can claim that it was worried it wouldn’t be able to collect the money from the depositor, that there was something unusual about the transaction, that your account was too new, or that you had too many deposits in a short period of time. And if those delays on your deposits lead your account into overdraft territory? Well, good luck getting those charges reversed.
Prepayment penalties
Did your bank very happily loan you some money, or arrange a mortgage for your house, and now your financial situation has improved, so you want to pay the loan off sooner than expected? Some banks may penalize you with a prepayment penalty. To be fair, these fees will be outlined in the loan agreement or mortgage paperwork, so you only have yourself to blame if you didn’t notice, but it’s a weird situation to be in where you owe someone money and they’re angry when you want to pay it back.
Unnecessary fees
Businesses love “fees.” Your cable company charges you a raft of mystery fees, delivery apps slap on a bunch of fees every time you order a burrito, and your bank will bury you in fees. Minimum balance fees, overdraft fees, service fees, and ATM fees are bad enough. But banks often also raise their fees in increments over time, so that what was once an irritation becomes a threat to your financial security. Banks love fees because they’re legal, easy to obscure in legalese, and extremely profitable.
What to do about it
You might need a bank in your life, but keep in mind it’s easy for that relationship to become abusive. Your best strategy? Read the small print—and shop around. You can—and should—change banks if your current one is nickel-and-diming you to death.