Something caught my eyes a few days ago and I've been meaning to post about it:

I saw this interesting article in the New York Times while I was browsing it at lunch one day, "The Card Game: Overspending on Debit Cards is a Boon for Banks."

The article chronicles a man who uses his debit card in order to keep better track of his money, and spend it more wisely. This is a technique pushed by many PF-ers, including the famous Dave Ramsey. But it isn't always as easy as it sounds. True, you don't have to worry about 29.95% interest when you can't pay off your debt, but that doesn't always mean that its cheap.

The man in the article made a deposit, but it took days to clear. While the bank was processing his deposit he spent a few dollars on coffee and was charged a $34 overdraft fee. The thing is - he had the money in the bank, it just hadn't cleared. Of course the bank wouldn't budge on refunding the fees. But that wasn't the worst of it: "Some banks further increase their revenue by manipulating the order of a customer’s transactions in a way that causes more of them to incur overdraft fees."

Most banks make more money on bank fees than they do on credit card interest now, totaling $27 billion in fees this year v.s $20 billion from credit, and it appears they are doing everything they can to keep that number high.

There is talk of legislation to curb these "abuses." and according to the article, "the Federal Reserve is considering requiring banks to get permission from consumers before enrolling them in overdraft programs, so that consumers like Mr. Means are not caught unaware at the cash register."

Of course the banks are arguing that if regulations are put on these practices they will have to distribute the expenses other ways, such as eliminating free checking accounts.

The article really struck a chord with me - how many people struggling to get out of debt and be smart are getting hit by the banks re-ordering their transactions trying to maximize their profit? Then again, if you were a bank and needed to come up with an order of operations, wouldn't you maximize profits too?

The moral of the story is to be very diligent about your finances. Expect transactions (especially deposits) to take several days to clear, and if you are close to going over make sure you monitor your spending daily. Maybe the "envelope system" of withdrawing cash at the start of the month is really the best way to go. You can't overdraft or rack up debt against your envelope...

Here's a discussion on the topic, at the Room For Debate Blog.