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Here’s how banks rearrange transactions in order to charge more overdraft fees

In 2016, America’s three biggest banks racked up more than $6.4 billion in ATM and overdraft fees, according to an analysis by CNNMoney.

That’s a lot of dough from extra fees.

If you’ve ever been in a tough spot and money was just a little too tight, you’ll know it’s easy to let a transaction sneak up on you resulting in an overdraft fee.

But if you’ve ever felt that the fees didn’t quite add up, there might be a reason.

Even if you think you have enough money in your account to cover certain transactions, banks can rearrange those transactions so that they get more fees out of you.

It’s a practice called debit resequencing.

A Pew Charitable Trusts report from December 2016 said that, at that time, more than 40 percent of banks in the U.S. shuffle transactions to maximize overdraft fees.

Lisa Servon, author of “The Unbanking Of America: How The New Middle Class Survives,” recently told NPR how it works:

“If you have, say, $100 in your account and you have a few checks that you’ve written – one for $75 and one for $125 and one for $25, the bank will look at those three charges that are going to hit your account, and it will order them in a way to maximize the overdraft fees.”

Let’s break down this scenario a little more.

There’s $100 in your account, with charges for $75, $25, and $125 all coming through on the same day and in that order. Now, if the $75 charge and $25 charge clear first, your balance will be $0 and you will only overdraft when the $125 charge hits. But, if the bank shuffles around the transactions so the $125 charge hits first, your account immediately goes into a negative balance. The remaining two transactions ($75 and $25) will then both incur overdraft fees.

debit-resequencing-2

Let’s assume your bank charges $35 for each overdraft. In the scenario above, with the original order of transactions, you incur a single $35 overdraft fee. In the resequenced order, those fees jump to $105.

By now you might be wondering “is this even legal?” and the answer is yes.

However, Pew and other organizations (such as the North Carolina Banking Institute) recommend that the practice be prohibited.

Additionally, the Consumer Financial Protection Bureau, the government agency tasked with making sure financial institutions treat their customers fairly, has kept a close eye on overdraft fees and continues to research them.

So what can you do?

Talk to your bank. “Many institutions disclose their transaction processing order, and often it’s in their terms and conditions,” the CFPB told Eye Opener.

The CFPB also noted,”It’s a complex area so many consumers might have trouble understanding the implications of a given order, even if it was disclosed in a clear manner.” For that reason, the organization offers clear steps on its website to help you reduce or avoid overdraft fees altogether:

1. Don’t “opt-in” to debit card-based overdraft: Your bank or credit union can’t charge you a fee for an overdraft with your debit card or at an ATM unless you “opt-in” to overdraft coverage for these transactions.

2. Link your checking account to a savings or money market account at your bank or credit union: If you run out of money in your checking account, the bank will pull money from the account you’ve linked it to when needed to cover new transactions. Note that many institutions charge fees for sweeping funds from a linked account but those fees are generally lower than per item fees for overdrafts or NSFs.

3. Track your balance as carefully as you can, and if your bank or credit union offers them, sign up for low balance alerts to know when you’re at risk of overdrawing your account.

4. Switch to a checking or prepaid account that does not authorize overdrafts. Note that some accounts that do not authorize overdrafts still charge NSF fees for returned checks and electronic (ACH) payment attempts.