Could you stomach paying $35 for a cup of coffee? Don't blame Starbucks if you do. Your bank may be the culprit.
Some consumer organizations are concerned about high fees being charged by a number of financial institutions when customers overdraw their accounts whether it's by writing a check, withdrawing money from an ATM, using a debit card or paying bills electronically.
"It's no longer true that if you have no money in the bank, the bank won't let you spend," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.
Let's say you're buying a $5 cup of coffee with your debit card, and you don't have $5 in your account. Your bank may not only let you overdraw your bank account, but you also could be charged more than $30 for that $5. Three cups of coffee at that rate would cost you more than $100.
"Today's most common overdraft systems are designed to generate more overdrafts from customers, resulting in enormous fee revenues for banks and credit unions," according to a July report by the Center for Responsible Lending. "These systems use a mechanism that makes small, unsolicited loans to checking-account holders whose balances are in the negative, collecting high fees for each transaction and often sinking them even deeper into the red."
The report contends that some banks and credit unions are posting charges against a checking account quickly while intentionally delaying deposits, lowering account balances by configuring debits to clear high-dollar items first and failing to warn customers during debit card or ATM transactions that they are about to overdraw their account.
Customers are paying about $17.5 billion in overdraft loan fees a year for $15.8 billion in abusive overdraft loans, the CRL report says.
Fox said these loans were deliberately left out of Defense Department regulations that implement the Military Lending Act, which limits interest rates on loans to military consumers and their families to a 36 percent annualized interest rate.
If you think your financial institution is too quick to charge fees, you have some options:
Check out your military bank or credit union. Banks that operate on military installations have agreements with the installation and operate there at the consent of the command, said retired Air Force Maj. Gen. Andrew Egeland, president of the Association of Military Banks of America.
"That kind of abusive practice is not something military banks engage in," he said.
"What our military banks do is extend courtesy overdraft protection," charging a processing fee, he said. The fees vary, but they are less than a returned-check fee.
"It is not a profit-generating function," Egeland said.
There are some civilian banks that offer courtesy overdraft protection. According to the Federal Reserve Board, banks generally charge a flat fee of $20 to $30 for each item covered. The charge prevents the customer from having to pay the merchant's returned-check fee.
Military-related banks and credit unions also know there are possible disciplinary repercussions for service members who bounce checks. Banks don't consider this courtesy overdraft protection a loan it's advancing the money until the funds are in the account.
If the bank sees a pattern of overdrafts, Egeland said, it will call the person in to try to get at the root of the problem. The bank will block an ATM or debit card at some point if it is being used to withdraw funds that are not available, he said.
Ask your financial institution about linking your checking account to a savings account or line of credit so that you're not hit with fees if you overdraw. The line of credit is a loan, and you would have to be approved. You also would have to pay interest, so ask about the interest rate.
Review your account statements each month.
Make sure you keep track of every penny you spend, whether you're writing checks, making debit purchases or withdrawing cash from an ATM. Record all automatic deductions and bill payments from your checking account, too. Use your record of your checking account, rather than relying on account balances from the bank. A check or other transaction may not have cleared, so it wouldn't be reflected in the balance.
If you don't have the money in your checking account, do not buy that $5 cup of coffee.
Got that? You're good to go.