Stop Getting Ripped Off: Why Consumers Get Screwed, and How You Can Always Get a Fair Deal

The Twenty-First-Century

Checking Account

I recently overdrew my checking account at Chase Bank by 60 cents, and my unemployment check was set to be electronically deposited later the same night. The overdraft would only exist for a few hours. The bank charged me $35 for a 60-cent overdraft. If this were interest, it would be 6000%, but since it is a fee, it is okay.

--Kate Hank,

a Red Tape Chronicles reader

Once upon a time, a checking account was simply for depositing paychecks and writing checks. As long as you noted the checks in a register, you were safe. If you bounced a check, it probably was your fault.

Those days are long gone.

Now, check writing is probably the least of your checking-account worries. Today, your checking account can be accessed at least six ways--ATM withdrawals, signature debit purchases, PIN debit purchases, online bill pay, and other electronic transactions such as wire transfers. And, of course, checks. In industry terms, your checking account has far more velocity now, making it far more vulnerable to hackers, and, more important, far more difficult to keep track of your balance.

The result? In 2007, Americans spent $17.5 billion making banks richer through overdraft charges, probably the most lucrative hidden fee in America. The notion of a free checking account is largely a charade. Banks created the overdraft phenomenon and stoke it by quietly adding features such as "courtesy overdraft protection," all the while tightening the screws more and more with each passing year. Overdraft fees now cost nearly $40 per transgression, and because the fees are often "stacked"--one overdraft leads to another, then another, and so on--one single lapse can easily cause a $5 hamburger purchase to ultimately cost $200. That means it's more important than ever to protect yourself, and your checking account, from heading south of zero.

It's not easy. There are other bank-designed booby traps, such as "Check 21." This new electronic processing system for checks means banks get your money instantly when someone cashes a check you write (no more "float"), but can still hold on to checks you deposit for long stretches of time (up to eleven days). In short, the money comes out much faster than it goes in. That's a recipe for overdrafts. Banks even vary by deposit type how quickly they credit your account when you deposit money. (Hint: At one major bank, online transactions are credited at 10:45 a.m. every day, in-person teller transactions aren't credited until 2 p.m., and deposits at newer ATMs don't make it until 8 p.m.!) Not knowing these rules can be costly.

But how would you know them? In 2007, 20 percent of banks were in violation of the Truth in Savings Act, a federal law requiring clear and conspicuous disclosure of their fee schedules. Quick: What does your bank charge for an overdraft?

In total, Americans donate $36 billion in fees to U.S. banks every year, or about $400 for every adult American. Virtually all of that spending is unnecessary. Anyone using the right tricks can have checking and savings accounts for free. This chapter will show you how.

BALANCING YOUR CHECKBOOK MONTHLY?

NO, DAILY

You'll hear plenty of old-fashioned advice about balancing your checkbook to prevent accidental overdrafts. If you're the type to do that every month, God bless. Software can help, too. But balancing a checkbook today is so much harder than it used to be; and even a monthly balancing won't really protect you from the $39 overdraft fees I'm talking about. Anybody can make a string of unexpected debit purchases during a month of bad luck (but not if you follow my advice and don't make debit purchases). Anyone can misunderstand checking-account deposit-credit policies. Anyone can accidentally click twice while using online bill pay and suddenly find their accounts unfunded.

Checking accounts are misnamed at this point--their real name should be something like "electronic transaction accounts" or "e-accounts." And for these accounts, we need a whole new branch of personal accounting.

In a moment, I'll tell you that you don't really have to balance your checking account to the penny every month. I want you to set up your finances so they run on automatic for you, without any fear of overdraft fees, and I'll show you how. But first, I want you to consider the simple proposition that change is good.

Here's the fundamental flaw introduced into your life by the debit card: There are too many transactions yanking money out of your primary wealth-holding account. For the vast majority of consumers, the modern checking account is the staging ground for most of their money. Paychecks are automatically deposited into it; money sits there earning paltry interest while you wait to pay bills, then you spend it. Think about it; if your after-tax paycheck is $1,500 twice each month, then $36,000 flows into your checking account every year. What do you get for that? If you have to claim more than $20 in interest earning on your federal taxes each year, then consider yourself lucky. My point is this: Whatever bank you use for direct deposit of your paycheck, you are giving that bank a hell of a deal. Why be loyal? If you suffer an overdraft fee and your bank isn't playing ball with you, break off the relationship. Join a credit union or a smaller bank. These almost always have lower fees, less brutal policies, and higher interest rates. Save yourself two overdraft fees and earn yourself an extra 0.5 percent interest, and you've just pocketed more than $200 annually. Then buy your spouse something nice for Christmas. That's sure worth the trouble.

But even if you don't switch, the knowledge that you can switch is really valuable. When you're having a protracted conversation with a bank manager about excessive fees, the most convincing argument you have is the front door, because if you announce you are walking out the front door, you'll often find your foe will come around to your point of view.

One special note about switching banks. Many of the suggestions I make rely on effective use of online banking tools. These are still evolving, particularly at small banks. Most are now free, but they are not all created equal. Before you sign up with a new bank, ask to see a demonstration of its website and its online bill-paying tools. Ask friends who use the site. If a bank's online tools are hard to use or come with any fees attached, you should probably keep shopping around.

Now, back to the concept of the everything-but-the-kitchen-sink checking account, the place where you "stage" all your money. This is a bad setup and I want you to change it immediately. You should never make ticky-tacky purchases or weekly cash withdrawals from the main staging place for your money. That's a recipe for disaster. Eventually, you're going to trip up, screw up, and be hit with a fee. You're also going to lose track of your balance and the normal ebb and flow of money into and out of your account. Using one account for all these things is a big mistake.

What you need is an allowance debit card.

Here's what I mean. I want you to set up a second bank account, either at your primary institution or, even better, at a second bank. Then each month, I want you to automatically send yourself spending money. That's the only account I want you to use for debit purchases or ATM withdrawals. In fact, you can go to your primary checking-account bank and ask them for an old-fashioned "ATM card" rather than a debit card to help you avoid accidental purchases out of your number one account.

When you divorce all those workaday transactions away from your "staging" account, a funny thing happens: You will be stunned at how easy it is to balance your checking account. One or two deposits each month, then five or ten checks/payments each month, and that's the end of it. No more hunting through your purse for ATM receipts. No more hours spent wondering where that other $2.23 went.

Here's how it would work in the checking account we've already described. Each month, there are two deposits totaling $3,000. On the first of the month, move $500 from your holding account to your spending account. During each month, make your payments as they come up. Here's what your primary checking account would look like:

When was the last time your checking-account monthly statement looked that neat and clean?

Obviously, your own monthly recurring payments will vary, but I want to call your attention to a few other things about this monthly payment sheet. For starters, notice how the payments are lumped together. That's no accident; nor is it due to some convenience initiative by the electric company and the cell-phone company. Some of your bills are due at around the same time of the month. By batching them together, you can keep your grasp on how much you are paying all at once. And by lumping them into two sets, you can essentially assign certain bills to check A and others to check B each month. This makes it easier to make sure you are running from ahead instead of running from behind.

Notice the savings payment comes at the happy end of the month, when you have something left over, which leaves you a little breathing room for unexpected emergencies. Many personal-finance columnists urge consumers to "pay themselves first," which is nice if you can do it. But ten months of extra interest earned by paying yourself first can be ruined by one bout with overdraft fees, so I wouldn't go that route unless I had a nice cushion to work with every month.

The big message here is that you have a rough idea of your cash flow all month long. If it's the beginning of the month, you know you have $1,500 minus $500 in living expenses and about another $700 in bills; if it's the end of the month, you know you have $1,500 to work with and $1,400 in bills.

The key to all of this, of course, is that you never dip below the equator and turn that balance red. You always know what you have, and you don't muck it up with long lists of $20 withdrawals and $1.98 bagel purchases.

All those daily activities are going on in your allowance account, which looks like this:

The beauty of the two-account system is that you don't really have to keep eagle-eyed watch over your spending account. Here's a little-known secret benefit to keeping close tabs on your budget. It's not oppressive or depressing, or even anal retentive. It's liberating. On the other hand, nothing creates more anxiety than spending-spending-spending and never knowing how much you've spent or what you have.

To make this work, an absolutely critical element is to be sure that no overdraft protection is connected to your allowance account, and that no minimum balance is required. This card is intended to be used until its empty, then no more. It will provide its own very specific, very brutal corrections if you try to spend more than you have. Your transaction will be denied.

Important note: This entire system breaks down if your bank attaches automatic "courtesy" overdraft protection to this account. When this account is empty, you simply want it to stop working. Because you'll never write checks against it, this account will be bounce-proof. And so will you.

One more note on your allowance card. Obviously you'll be using this card for lots of ATM withdrawals. So it's critical that you find a bank that doesn't impose ATM fees, and that refunds other banks' fees. The average consumer pays almost $100 each year in withdrawal fees. (Many withdrawals now cost $2 at your bank + $3 at Bank of America = $5. Do that twice a month and you reach $120 by the end of the year. Boy, would that eat into your allowance.)

This is why shopping around for your allowance card is critical. Credit unions and small banks tend to have the most generous terms, but no one offers infinite largesse. Most banks limit their fee refunds to $10 or $15 each month, so it's better to take out larger sums less frequently. Still, even if you do pay a fee here or there, you're getting a 50 percent discount because you're only paying the "foreign" bank where you make the withdrawal, not your own bank.

A special note to couples: Married couples and others sharing joint accounts know keeping track of spending and finances can be among the most vexing topics in a relationship. For them, the allowance-account strategy can be a godsend. Most couples never think they'll have the kind of miscommunication that sees them both withdrawing $300 from the ATM on the same day to make sure they have cash for that big weekend trip. But it happens. All the time. The best way to stop it from happening is to make it impossible. Opening a joint allowance account is one option--as long as that account is bounce-proof, as I've described. But a more practical solution is to open a holding account that's used for all paychecks and common bills, then giving each partner an allowance card.

Whatever system you use, I want you to adhere to one simple premise--stop using one checking account for everything.

Of course, I know some of you out there want to keep better track of exactly what you're spending and when you spend it. You know the truism that if you really want to get control of anything in your

life--how much you eat, how much you spend, how much you

exercise--you've got to write down everything that happens. Nothing is more sobering to a dieter that a diary of food intake; ditto for big spenders.

Good news: Keeping all your spending in a separate account makes this infinitely easier.

A growing list of online software companies such as Mint.com and Buxfer.com will even help you convert your spending account into useful pie charts and balance sheets. These sites also offer fee-busting tools that are indispensable. When your balance gets near some critical amount--either near a zero balance or near a minimum-balance requirement--Mint and Buxfer can send you a warning email, or even an instant text message to your phone (or your spouse's phone). That will let you deal with the problem immediately and perhaps even make some simple, profitable choices like postponing a sweater purchase for a week until you're sure you have the money to cover it.

Some consumers might not like the idea of giving a single company so much information about their financial life. Such privacy concerns are valid. Still, you can choose how much you tell each site--you can limit the data shared to certain accounts, such as the allowance account I'm describing. That will protect your privacy and still provide automatic warnings.