Consumers need to be vigilant to ward off overdrafts, bank fees

— -- Banks are increasingly offering tools such as balance alerts to help manage accounts. But consumers say it's still far too easy to overdraw their accounts.

Nancy Tersigni, 43, a divorced mother of two in Tampa, says she recently incurred $175 in overdraft fees for small-dollar debit card purchases such as coffee and lunch. She's angry that large banks clear transactions in a way she says maximizes the fees she pays.

Kelly Spradlin, 33, regularly checks her account balance via phone to avoid overdrawing her account. But that didn't keep her from getting hit with overdraft fees of $400 within a few months last year. Living on a tight budget, she says the fees "affected my (ability to pay) groceries, gas money, everything you need to live on."

Banks say that good financial management can help consumers avoid most bank fees, including charges for overdrawing their accounts. Most banks, for instance, allow consumers to set up alerts that warn them if their balance dips below a specified amount. Many banks also provide free access to accounts online, by phone and via ATMs.

Industry representatives say consumers should take responsibility for managing their money and not blame banks for their fiscal woes. "Consumers are in the best position to know what their balances are and to pay attention to their money," says Nessa Feddis, a vice president at the American Bankers Association (ABA).

Bank practices may contribute

But Lauren Zeichner Bowne, a staff attorney at Consumers Union, says banks' policies make it difficult for consumers to avoid overdrawing their accounts, and disproportionately hurt the most financially vulnerable. How that's happening:

•Automatic enrollment. Banks have long offered traditional overdraft protection that consumers sign up for. These programs, for a small fee, transfer money from a savings, credit card or home-equity line of credit when consumers don't have sufficient funds in checking to cover a transaction.

But in recent years, banks have also begun automatically covering consumers' overdrafts — even if they didn't sign up for a service — and then charging them a fee for doing so. This automatic coverage, which banks sometimes refer to as "courtesy overdraft," has come under fire from lawmakers, regulators, advocates and even attorneys.

Bank of America bac recently agreed to pay $35 million to settle a class-action lawsuit related to overdraft fees. The lawsuit alleged that BofA authorized transactions that led to overdraft fees and posted transactions in an order that increased such fees. BofA, in settling the lawsuit, denied the claims and said that its policies fully comply with federal law. The bank declined further comment on the lawsuit.

The National Consumer Law Center has also sued Washington Mutual — now part of Chase jpm— for its overdraft policies. Chase declined to comment on pending legal matters.

The fees take their toll: Each year, consumers pay $17.5 billion in overdraft fees— more than the $15.8 billion that they're actually overdrawing, estimates the Center for Responsible Lending.

•High-to-low clearing. Banks say their research has found that consumers want them to clear checks from high-to-low dollar amount, and are willing to pay a fee for this service.

"In an ideal world, banks would call their customer in the evening ... and ask them what payments they would like paid first," says the ABA's Feddis. "Unfortunately, that isn't a realistic option, so some banks pay the largest items first."

Large banks are more likely to process items in high-to-low order, the Federal Deposit Insurance Corp. found in a February survey, and about half of overdrafts occur at ATMs or via debit card transactions, which tend to be for smaller amounts.

Michael Moebs, founder of Moebs Services, which consults with banks, says that because debit card transactions tend to be for small amounts, consumers generally prefer banks to deny their purchases than charge a steep fee for covering them.

•Confusing bank statements. Advocates say it's often difficult for even financially responsible consumers to figure out how much they have in their account. That's because some banks immediately credit deposits, even if the transaction hasn't cleared, making it appear that consumers have more money than they do.

Spradlin says she overdrew multiple times because BofA quoted her a balance on the phone that didn't reflect pending debits. (Pending debits are those that have been completed but have not posted to the account.) She says that made her balance appear higher than it was.

BofA, like most banks, processes transactions once a day, says spokesman James Pierpoint. So if consumers check their account during the day, the balance may not reflect transactions yet to be processed. This explanation doesn't satisfy Spradlin. "If you're trusting a bank to manage your money," she says, "they should be liable to report to you the exact amount of money in your account."

Online banking

Banks tell consumers that online banking is a simple, accurate way to manage their transactions, and to avoid overdrafts. But Tersigni found this to be little help earlier this year. An online bank statement provided by Wachovia, she says, listed her balance on Feb. 10 as $4.61. Though she wasn't overdrawn, she was hit with three overdraft fees that same day and two the next day.

Wachovia, which was acquired this year by Wells Fargo wfc, eventually refunded $87 of the $175 in overdraft fees. Tersigni still doesn't understand how she incurred most of the fees. Wells Fargo declined to comment on Tersigni's situation, but spokeswoman Julia Tunis Bernard says Wachovia customers can ask the bank to decline debit transactions that overdraw the account.

Higher overdraft fees hurt consumers and the economy, Tersigni says. "It's ridiculous that the very banks that we're bailing out as taxpayers are charging us $35 for each overdraft," she says. "That's money I could be dumping back into the economy."

The Federal Reserve is accepting comments about overdraft policies until March 30. Consumers can e-mail them to regs.comments@federalreserve.gov— reference Docket R-1343 — or submit them on the agency?s website, at federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

2009 USA TODAY bank overdraft survey

TELL US: How does your bank handle overdraft fees? have you ever complained about these practices?