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Dr. Don Taylor, CFA, Bankrate.com advice columnistAre banks' overdraft fees unfair?

Dear Dr. Don,
I don't feel you sufficiently explained the purpose of the overdraft fees in "Don't blame bank for your mistakes."

I recently incurred $377 in overdraft fees, and I admit they were all my fault because of using my check/debit card and not accounting for the delays that it takes for the transactions to actually be posted to the account. 

I was basically charged a $35 fee 10 times. I don't see how that is fair. What are these fees used for? I mean really -- do they have to work overtime to process them? Do they have to use that much more paper? I don't fault the bank for penalizing me for the overdrafts. After all, it was my fault. But $350? Come on! Isn't it true that they are actually benefiting from these fees?
--Concerned Carol

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Dear Carol,
The purpose of overdraft fees is twofold. First and foremost, it is fee income for the bank. Second, it is a deterrent against customers spending money that isn't in, or available in, their accounts. The fees aren't based on what it costs the bank to manage or monitor the overdrafts, although they do need to cover that cost. It's not about fair.

From the customers' point of view, it makes sense for banks to post the lowest-dollar debit amounts first in a day's transactions. That would minimize the number of overdraft charges in the account. Banks sometimes make the argument that it makes more sense to post the higher-dollar debits first because they are more likely to be important consumer bills such as the utility bill or mortgage. Regardless, the bank isn't singling you out. The process is automatic.

Unfortunately, the people who can least afford these fees are the ones most likely to get hit with them. Talking to your banker about getting some of these charges waived is the best approach to minimizing the financial hit after it's happened, but the real winning strategy is to know the available balance in your account, less any pending transactions, and to keep your account balance in the black.

The stakes are higher than the $377 you paid in fees. Banks monitor your banking history just like credit card companies monitor your credit history. I suggest you pull the free copy of your ChexSystems report you're entitled to once each year to see if your overdrafts were reported. If so, they'll stay on that report for five years.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Aug. 14, 2006
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