Think twice before you swipe that debit card if you have a low balance: Your bank is getting fat off your overdraft fees.
Over the first three quarters of this year, 626 large banks reaped a windfall of $8.4 billion from overdraft and "non-sufficient funds" fees, according to a report from the U.S. Public Interest Research Group, a federation of consumer advocacy groups. That's up 4 percent from a year ago.
Overdraft fees are charges banks assess when a transaction puts your balance in the red. Institutions charge a "non-sufficient funds" penalty when your account is already in negative territory and your purchase is rejected.
These charges continue to be a bonanza for banks, despite the Federal Reserve's 2010 regulations that sought to bar them from assessing these fees unless customers have opted into an overdraft protection program.
"The point is that the rule is very important because it prevents you from overdrafting your debit or ATM card unless you opt in," said Ed Mierzwinski, consumer program director at the U.S. PIRG.
"But the rule didn't do anything about the other two problems identified by consumer advocacy groups: reordering transactions and the allowed maximum number of overdrafts in a day," he said.
Moneymakers for banks
When an institution reorders transactions, it shuffles a large purchase so that it clears before subsequent smaller debits are charged against your balance. This allows banks to maximize overdraft fees.
Here's how it works: You have $100 in your checking account, and as you go throughout your day, you spend a total of $25 on three small purchases. Later that same day, your bank clears a check you wrote for $100.
When a bank reorders a transaction, it will post the $100 first — even though it was the last charge against your account — and post the three smaller charges that total $25 afterward.
This way, the bank assesses fees on each of the last three smaller purchases, rather than charging one fee for the check.
The median overdraft fee is $34, according to the Consumer Financial Protection Bureau.
Banks also have different policies on the number of fees they permit in a given day. Some will allow you to overdraft more than five times in a day, which can rack up hundreds of dollars in additional charges to your account, according to data from NerdWallet.
"Banks offer customers multiple tools to avoid overdrawing, including text alerts about low balances and the ability to monitor their accounts online, on a mobile device, at the ATM or by telephone 24/7," wrote John Hall, a spokesman for the American Bankers Association, in an e-mail.
"Customers who want debit card and ATM overdraft protection must proactively opt-in and can opt-out at any time," he wrote.
Lion's share of fees
The average bank pocketed $17.76 in overdraft fee revenue per customer in the first three quarters of the year, up 2.6 percent from the year-ago period, according to the U.S. PIRG's report.
Ten banks account for two-thirds of overdraft revenue. Many of the institutions are nationally known, but one is regional. See below.
Stay out of the red
In order to avoid the additional fees, customers ought to take a look at their bank statements and determine whether they're enrolled in an overdraft program. Sometimes it's better to pay cash for small purchases or to have those transactions denied altogether, as opposed to racking up hundreds of dollars in fees.
"The main message for the consumers is that if you're bouncing checks and paying fees that constitute a $38 cup of coffee, then you've opted into a service that's serving the bank and not you," said Mierzwinski.
Another suggestion is to go back to the basics: Balance your checkbook and be vigilant for transactions that could put you in negative territory if they clear.
Finally, keep a buffer if you live paycheck to paycheck. "When your account says you have $100 in it, pretend it has zero," said Mierzwinski. "Don't use it until you put another $100 in it."