Beyond Overdraft Fees: 5 Bank Traps to Avoid

Two of the country’s largest banks are overhauling their overdraft programs, touting simpler terms and stronger consumer protections. But the days of the $35 charge on the $3 latte are far from over.

JP Morgan Chase (JPM) announced Wednesday that, beginning in the first quarter of 2010, it will eliminate overdrafts for debit card use, giving customers the option to opt in for the service. The bank will also reduce the maximum number of overdraft fees from six to three per day, and will not charge any fees if an account is overdrawn by $5 or less. Bank of America (BAC) said Tuesday that, starting Oct. 19, it will allow its existing customers to opt out of overdraft coverage. It will also stop charging fees if an account is overdrawn by $10 or less, and will not charge fees on more than four items per day. In June 2010 the bank will introduce an opt-in feature for new customers. (Until then, new customers automatically receive the feature and have to call to opt out.)

The announcements come on the heels of deepening political pressure on the industry to eliminate practices deemed abusive to consumers. After the successful passage of a sweeping credit-card law, in effect February 2010, Congress is turning its attention to other banking practices. Last week, Sen. Chris Dodd (D., Conn.), chairman of the Banking, Housing and Urban Affairs committee, announced that he is working on legislation to curb “excessive” overdraft fees. A similar bill was introduced in the House of Representatives earlier this year by Rep. Carolyn Maloney (D., N.Y.).

The moves by Bank of America and Chase are steps in the right direction, but consumer advocates say that much stronger protections are needed. “They’re modest changes to a draconian program,” says Ed Mierzwinski, the consumer program director for the consumer advocacy U.S. Public Interest Research Groups.

Many of the practices that lead consumers to overdrawing their checking accounts in the first place continue to exist. Here are five.

Reordering transactions made over the course of a day, so that largest payments clear first, followed by smaller payments, is a common bank practice. It is also one that maximizes overdrafts, Mierzwinski says. Here’s how this works: Say you have $100 in your checking account and you make a $20 purchase, then one for $5 and one for $85. If the banks clears your payments in the order they were received, you’d pay one overdraft fee. But if they clear the $85 payment first, followed by $20 and $5, you’d be charged two overdraft fees.

Starting in the first quarter of 2010, Chase plans to modify payment posting order to reflect ATM withdrawals and debit-card transactions as they occur. But Bank of America is not planning to change the posting order of checks and debits, which is currently from largest to smallest. To avoid this trap, always make sure you have enough cash in your checking account to cover your debit-card payments and outgoing checks.

Not able to repay the overdraft and fee within a few days? Prepare to pay even more. Over 60% of the largest banks charge so-called “sustained overdraft” fees when consumers are unable to bring their account balances back to $0 or more, according to a study conducted recently by the Consumer Federation of America, an advocacy group. Bank of America started charging a $35 sustained overdraft fee in June. Chase charges between $12.50 and $22.50 after five days. Some banks are even boosting their fees: In August, BB&T started imposing its $30 extra fee after five days, down from seven.