Banks, for the most part, accommodate customers’ personal banking needs and provide perks that encourage saving. On the other hand, they have questionable practices that endanger people’s finances. Reordering is an example of this practice.
When people come up to me for bank recommendations, I don’t give a definite answer. Instead, I advise them to choose a bank based on their banking needs, saving habits, and priorities. Which is more important, a higher interest rate or a lower minimum average daily balance? Is the lack of certain mobile and ATM banking functions, like cardless withdrawals, a deal-breaker? Your answers to these questions will guide you when choosing a bank.
However, there is one thing I tell people to watch out for: Banks who justify reordering credit transactions.
A Debt Trap
Banks typically offer overdraft protection to checking account owners. It is a privilege that allows customers to buy an item even if their checking or credit account is short of funds. Overdraft protection is for your convenience; it helps you avoid fees and penalties from bounced checks. Also, it essentially lets you take out a small loan but only up to an agreed amount.
It’s not a free service, however, and if you’re not careful, you could rack up a massive debt over time.
When you overdraw, you need to pay the following:
- An overdraft fee, which averages $35 in America
- The amount you borrowed
- The accrued overdraft interest on the daily overdrawn balance
The third fee implies that the longer you wait to pay your overdraft dues, the bigger your debt becomes.
Abuse of Overdraft Fees
Overdraft protection becomes controversial if your bank reorders your credit transactions. It forces you to accrue overdraft charges, which can significantly increase your debt.
Here’s how reordering works.
Suppose you have $150 in your checking account. Then you go and pay your bills and issue checks worth $70, $40, and $155 — in that order. Logically, your bank should have processed the payments for $70 and $40 without problems; and with overdraft protection, your payment for $155 goes through, but costs you $35 in overdraft fees.
With reordering, the transactions get shuffled not by order of when you issued them but by value. A bank that reorders will process your $155 check first (your largest transaction within the day), ensuring that you’ve already overdrawn on your account. It then processes your payments for $70 and $40, adding three more overdraft charges to your account.
Without reordering, you would only have to pay $35 in overdraft fees; but with reordering, you’ll be paying $105 in overdraft fees. That’s a $70 difference that can quickly go higher with a delay in payments or repeated overdrafts.
Policy and Disclosure, Says the Banks
Many banks around the world are guilty of reordering. Unfortunately, many governments are reluctant, even negligent, in putting up legislation that will protect bank customers from this insidious practice.
As a banking customer, you need to be careful about how you use credit and checking privileges. If you’re still looking for a bank, read the fine print carefully and look for clauses on reordering. The bank may justify the practices through these terms:
- Reordering ensures that important transactions, which are often the ones of higher value, get paid first.
- Overdraft privilege is an opt-in privilege, so if you signed the contract, you agree to all its terms and conditions — including reordering.
Whether you agree with these reasons is up to you. Personally, I avoid banks that observe the practice as a matter of principle.
If you can’t help but open a transaction with a bank that practices reordering, make sure that you can at least opt-out of overdraft protection. The inconvenience of an unprocessed transaction is better than dealing with financial repercussions later.
Also, check the fine print for clauses on forced arbitration. They make it difficult for you to take a complaint to court because you’ll have signed a contract saying you’ll arbitrate instead of litigate. If worse comes to worse, you need the freedom to band with other customers and file a stronger case together.
I hope that with this article, you become more vigilant with your checking accounts. Most of all, make a habit of ensuring your checking account has enough funds before you write a check.
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