Payday loans and your bankPayday lenders have well-deserved reputations for charging insanely high rates for the short-term loans. But you'll never guess who is gouging customers even worse: your bank.

Don't be fooled by the slick marketing materials, established names, and upstanding reputations: When a customer tries to tap more cash than they have available in their accounts, these banks charge overdraft fees on the money they're floating you, charging a pretty penny until you settle up.

According to a recent survey by the Consumer Federation of America, overdraft fees can be as high as $37 per overdraft. While that may not sound so bad on a single item, it can add up quickly both if you have multiple amounts overdrawn and have not resolved an overdraft for a number of days, as well. That combination can make overdrafting an account an unbelievably expensive mistake.

Just how bad? Well, according to that survey, Fifth Third Bank (FITB) can charge a person's account as much as $370 per day in overdraft fees. And there's no limit to what HSBC (HBC) can charge.

Imagine a situation where, all on the same day:

  • Your automatically debited mortgage payment went up by $100 -- to a total of $1,100 -- due to increased tax and insurance escrow.
  • Your niece cashed that $20 birthday check from six months ago.
  • You took out $40 in spending money from the ATM.
  • You whipped out your debit card to buy a $10 lunch.

Say you had forgotten about the increased mortgage payment. Based on your old mortgage payment and your planned expenses for the day, you were expecting a $1,080 account balance to cover your costs and leave you with $10 in the account. Well, instead, you would likely find yourself with up to four separate overdraft charges for being $90 overdrawn.

If you didn't find out about or fix that overdraft until your bank statement came two weeks later, you could see sustaining charges as well. Take those fees and add them together, and the costs can be ugly, indeed.

The chart below shows just how bad it can get for that four-item, $90 overdraft, for two weeks:

Up-Front Fee
Sustaining Fee
Total Overdraft Cost
Bank of America (BAC)
Capital One (COF)
JPMorgan Chase (JPM)
SunTrust (STI)
Source: Consumer Federation of America.

In every case, you're paying well over 100% of the total amount overdrawn in penalties and fees for a two-week overdraft. That's a rate that most payday lenders would love to charge.

Don't Just Sit There and Take It

Fortunately, overdraft fees are fairly easy to avoid if you're careful about how you're managing your cash flow. The tips below can help you keep those fees at bay:

  • Keep good records of your spending and only swipe your debit card, use the ATM, or write a check if you're sure you've got enough cash in your account.
  • Never rely on "floating" a check in the hopes you can get a deposit into the account before the check clears.
  • Opt out of overdraft rather than letting your bank charge you for that borrowing privilege.
  • Consider signing up for your bank's "automatic overdraft transfer" service as a less expensive alternative to overdraft.
  • Use a credit card instead of a debit card to make purchases, to cut down on the risks of overdraft (but pay off that credit card balance every month).
  • Regularly check your bank account balance online to assure you've got sufficient funds.

And of course, if you do find yourself with a truly one-time issue that results in an overdraft fee but are otherwise a strong customer for your bank, you can always ask for the charge to be reversed. Many banks will reverse the occasional such charge in order to keep their valuable customers from switching to their competitors.

Regardless of whether you're never paid an overdraft fee or you regularly get dinged for them, knowing how they're charged can help you avoid them in the future.

At the time of publication, Motley Fool contributor Chuck Saletta owned shares of Fifth Third and Bank of America. Click here to see his holdings and a short bio. The Motley Fool owns shares of Bank of America, Fifth Third Bancorp, JP Morgan Chase, and PNC Financial.

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Michael Hickey

Only in America can you make a deposit at a bank, use debit on the next day using part of that deposit, and then two days after that, get an NSF for using the debit after you already make the deposit, and said deposit had even posted, just for them to remove the posted deposit later on in the day, post the withdrawal the next day, repost the deposit that had previously vanished a day after that, plus slap you with a $36 NFS fee. Make a large deposit and use debit multiple times? Watch them hit you with an NSF for EVERY ONE of those debits as the bank plays their little shell game scam, and then when you go in to complain, watch them point their finger back at you, even when you show them to their face the scam they are pulling! Makes you proud of bailing out these banks, huh?

Meanwhile, it's really funny to read the comments from the self righteous peanut gallery, preach up and down about personal responsibility as though they've never even bounced a check in their lives! Who the hell are they kidding? The arrogance is breathtaking!

But hey! Not my problem anymore! I no longer do any business with American banks. They're all crooks, anyway.

January 29 2013 at 7:14 PM Report abuse rate up rate down Reply

Read the service agreements at any bank, set up your accounts accordingly, never spend more than you have and you'll never pay a dime in fees. The only people who pay fees, or use use payday lenders, are the same illiterate scum that clog up social welfare programs and provide nothing useful to society as a whole. The more fees we take from the likes of this ilk the better, they've been living off the back of the working man long enough. Let these same dirty animals pump millions back into State lotteries as well. If they're stupid enough to play then we should gladly take their money and put it back towards something working people can benefit from.

June 13 2012 at 7:16 AM Report abuse +1 rate up rate down Reply
1 reply to ilm9p's comment
Michael Hickey

Well well. Aren't you the little elitist?

January 29 2013 at 6:20 PM Report abuse rate up rate down Reply

I have overdraft protection,but check out the rates that the banks charge to "give" you an advance. The government closed down the payday loans and the banks profitted. Go figure!!

June 12 2012 at 12:06 PM Report abuse rate up rate down Reply

I've been very happy with BOA service, but I have to admit, their overdraft fees are a little stiff. What is particularly galling to me is that if you have, say, a $10 accidental overdraft, they will transfer $10 from your savings account to cover it, and STILL charge you the overdraft fee. You just have to be very careful and avoid overdrafts.

June 12 2012 at 11:47 AM Report abuse rate up rate down Reply

I have to believe this article is a sop to the Obama campaign, trying to reinforce their image of the "greedy" banks taking advantage of the "little guy."

June 12 2012 at 11:47 AM Report abuse rate up rate down Reply
1 reply to rohlemeyer's comment

So you think this policy of the banks is acceptable? You think banks are charitable institutions? You think the financial chaos we're living in is the "little guys" fault? This article is nothing more than a good lesson in taking care of your money. There was nothing about politics in it. When somebody tells you it's a bad idea to leave your keys in the care with the doors open while you go to the movies do you suspect it"s politically motivated? For crying out loud, lighten up.

June 12 2012 at 3:58 PM Report abuse rate up rate down Reply

Wells Fargo has been very customer friendly when it comes to overdraft charges. When my father or I have multiple charges on one day like described in the article above, they always reverse half of them. Of course it doesn't happen a lot, but I've been happy that they've bended a little when it comes to fees.

June 12 2012 at 10:53 AM Report abuse rate up rate down Reply

My mattress never charges me for nothing

June 12 2012 at 10:15 AM Report abuse +1 rate up rate down Reply

I agree one needs to be accountable for his or her actions. If the bank didn't impose charges on overdrafts the low lifes of this country would have a land rush and be spending way more than they have. BUT, I was victimized by BOA by a scheme they got busted on called check sequencing. By applying checks in a way that caused more overdrafts they generated 5 overdraft charges instead of 1 That is criminal. Yes it was my fault not having enough money to cover my checks but they took advantage of the situation. So don't be to quick to side with the banks, they have sins of their own.

June 12 2012 at 10:14 AM Report abuse +1 rate up rate down Reply
1 reply to dickbambam's comment
Michael Hickey

You don't have to tell me they're crooks. I'm more than familiar with some of the accounting shell games that they play. I've had posted deposits just disappear, and then reappear after withdrawals were made so it doesn't even matter if you had more than enough money in the bank to cover your debits. They will screw you just the same.

Go to a Canadian bank and make a deposit. It's posted to your account right away and they don't play games with you. That's because the banks there are actually regulated, and it's a good part of the reason why their economy is more stable as a result. There is no logical reason why it should not be posted to your account right then and there if you walk into a bank branch with cash, asking to make a deposit. Yet in America, the deposit will basically post whenever it's convenient for them. That is ridiculous! Your money would be more safe under a mattress at that point.

January 29 2013 at 7:32 PM Report abuse rate up rate down Reply


June 12 2012 at 9:14 AM Report abuse -1 rate up rate down Reply

The people that use these pay day lenders are for the most part sum anyway. Who cares if they get ripped off?

June 12 2012 at 9:10 AM Report abuse -3 rate up rate down Reply