A bill before Congress would limit overdraft fees and ban practices that increase the likelihood that customers will overdraw their accounts. One of those practices is known as re-ordering. Banks will sometimes clear several transactions starting with the largest amount first.
"It's something that overall in the industry certain institutions have done to increase their fee income fairly quietly," said Phillip Hunt, chief financial officer for KEMBA Financial Credit Union.
An economic research firm, financial institutions nationwide raked in $32 billion in overdraft charges last year. The fee is charged when customers go into negative balances on their bank accounts. The average fee is $30 to $35.
"I've seen it as high as $40 for a transaction. Many institutions also have a fee if you keep your account negative more than three or five days," Hunt said. That fee is usually $8 to $10 and is charged each day the account remains in the red.
A study by the FDIC found that consumers who overdrew their account more than 20 times in one year paid an average of $1,610 in overdraft fees annually, and 90% of those overall fees are generated by just 18 million customers.
The bill would limit overdraft fees to one per month and six per year. It would also require the fees to be reasonable and proportional to the amount of the overdraft. For example, you wouldn't be hit with a $30 fee for going $5 into the red.
Re-ordering would also be outlawed under the proposed legislation.
"If a person intentionally overspends their account they know what they are doing, but when you have practices that are to trip up the consumer that's not as it should be," Hunt said.
Hunt suggests you always balance your checkbook and try to keep a little extra in your account if possible. He also thinks it's a good idea to talk with your bank or credit union about their overdraft policy.