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Chase dumps overdraft fee on $5 purchases

The way big banks penalize customers for overdrawing their accounts is in a state of flux and can be confusing. Here's what you need to know.

By Karen Datko Jun 27, 2012 4:27PM

Image: woman swiping a credit card © Rubberball/Mike Kemp/Rubberball/Getty ImagesAfter July 21, JPMorgan Chase customers will no longer pay an overdraft fee if they make a purchase of $5 or less and don't have enough money in their account to cover the debit card transaction.


That means you can overdraw your account many times and not pay overdraft fees if each overdraft doesn't exceed five bucks. 


That's a sweet deal for those challenged by simple math or living on the financial edge. But don't thank Chase for its generosity. It's part of the continuing fallout from a number of class-action lawsuits over how big banks processed checking account transactions from largest to smallest -- rather than chronologically -- which resulted in more overdraft fees.


In recent developments:

  • Pittsburgh-based PNC this week agreed to pay $90 million to settle the lawsuit filed against it. Others that have settled include:
    • Bank of America, $410 million.
    • Citizens Bank, $137 million.
    • JPMorgan Chase, $110 million.
    • TD Bank, $62 million.
  • A lawsuit addressing similar issues was filed this week against a suburban Chicago bank.

Chase proposed to stop charging an overdraft penalty fee on purchases of $5 or less during its lawsuit settlement talks, according to The New York Times. The new policy applies to purchases made by either debit card or check. (Post continues below.)

SunTrust has no overdraft fee for any purchase of $4.99 or less, but other big banks continue to impose an overdraft fee on small purchases.


In fact, big banks are all over the map when it comes to terms and conditions for when an overdraft fee is charged and how much it is. That makes it maddening for those who want to compare terms before they switch banks -- an increasingly popular activity. SmartMoney reports:

Nearly 10 out of every 100 customers made a change with their primary account in the past year, according to a 2012 study by J.D. Power and Associates -- a share that has risen by almost 25% just since 2010. So far, analysts say, most of the shifts have been in favor of smaller banks and credit unions.

If you're shopping for a new bank or credit union, here are some of the questions you should be asking about overdraft fees:


In what order does the bank process daily transactions? For instance, Chase is one of the banks that now process most transactions in chronological order. According to a recent survey by Consumer Federation of America (.pdf file), Bank of America continues to be one of those banks that process the biggest transactions first.


Is there a daily threshold for overdraft charges? For instance, Wells Fargo won't charge an overdraft fee on accounts that are overdrawn by $5 or less at the end of the day. For U.S. Bank, it's $10, says CFA. (Note: Banks' terms and conditions can change at any time, so visit a bank's website to get the latest details.)


For what types of purchases are overdraft fees assessed? Bank of America, Citibank and HSBC don't allow debit card overdrafts at the point of sale, according to CFA. If the money's not there, the card will be declined. Citi and HSBC also won't process overdrafts at ATMs, denying you access to cash you don't have, but you won't face a nasty fee. 


How much is the overdraft fee? The median overdraft fee has remained $35 since 2010, but five banks have tiers of fees, based on overdraft numbers or size.


Is there a daily limit on overdraft fees? The most common policy among the big banks is to charge no more than four overdraft fees a day. The median maximum daily total charged by big banks is $140, says a recent study by the Pew Charitable Trusts' Safe Checking in the Electronic Age Project (.pdf file).


How much is the extended overdraft fee? While banks have taken steps to reduce the burden of overdraft fees caused by small purchases, they've also increased something called the extended overdraft fee, charged to those who don't get their accounts in order in, say, five to seven days. Says the Pew study:

A higher percentage of bank checking accounts now charge an extended overdraft penalty fee if an overdraft is not repaid in a timely manner. The median extended overdraft penalty fee has increased by 32% (to $33) since 2010.

The study also says banks' explanations of their account policies are absurdly long -- a median of 69 pages -- and indecipherable, making it really difficult for bank customers to compare and find a better deal.

Of course, if you never overdraw your account, a bank's overdraft policies won't be a priority for you. To get better control of your checking account, take these steps:

  • Keep track of how much you have in your checking account. With online banking and mobile alerts, this is extremely easy to do.
  • Keep a cushion in there, so you're sure not to get near the $0 mark.
  • Use cash.  
  • Don't opt in for so-called overdraft protection. Without it, your debit card will always be declined at the point of sale if you don't have enough money. The embarrassment you'll feel is worth saving $35, don't you think?
  • If you're the type who can't be bothered to keep track of what's in your checking account, get traditional overdraft protection. CFA says:
All 14 of the largest banks provide lower-cost traditional forms of overdraft protection, such as transfers from savings or credit cards and overdraft lines of credit. Fees to transfer funds from savings to cover checking account overdrafts range from $10 to $20 per transfer. 

You've got to be informed and do your homework. Remember, you're dealing with very large corporations that want to make money from you. Banks took in an estimated $30 billion in overdraft fees last year.


More on MSN Money:

Jun 28, 2012 11:47AM
My credit union charges ZERO for debit card or checking overdrafts if there's enough money in my savings account to cover it.  It simply switches the money over.  Why can't the banks do that?  At most banks, there's no charge to go online and transfer funds from one account at the same bank to another so why should there be an expense to automatically cover checking deficits with savings account funds?
I also pay NOTHING for swiping my debit card, including no charges whatsoever at 59,000 ATMs nationwide, including those in every 7-11, and another 10,000 ATMs overseas.
I was amazed when, switching to credit union after being charged for new checks for the first time in my life and tired of being nickel-and-dimed by the bank, so many things suddenly made sense.  I get regular savings account interest (0.6%) equal to M&T's 5-yr CD.  My credit union 5-yr CD's pay 2% and have only a 3-month interest penalty so you're getting at least 1.5% interest if it's kept at least a year.  I also get free checks, and no monthly account, Internet, etc. charges.  And most credit unions, even if they have names like "State Employees Credit Union" are open to almost anyone and are federally insured.
Jun 27, 2012 5:54PM

This is nothing more than a publicity stunt by Chase. I mean, really, how many people make $5.00 purchases?

Really, Chase? This is the best you can do? I don't think so.


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