Yet Another Wells Fargo Scandal: How to Protect yourself from Overdrafts (or Switch to a Credit Union)

Wells Fargo got trouble last year for opening up accounts for their customers without their consent. Aside from being another good reason to keep an eye on your credit report, this was a scumbag move from a big bank that earned them a lot of negative comments from customers, former employees, and even senators.

More recently, Wells Fargo has been caught with its hand in another cookie jar. They've been purposefully reordering customer's transactions with the goal of hitting them with as many overdraft fees as possible.

Overdrafts: How to Kick 'em when they're Down

An overdraft fee is a fee the bank charges you when you spend more money than is in your bank account. Usually, the bank will let the transaction go through, making an overdraft fee act like the interest on a very, very expensive loan.

The people who are hit with overdraft fees are exactly the people who can't afford to pay them: folks who don't have much in their bank accounts.

Overdraft fees themselves are a money maker for the banks, and they're perfectly legal according to the contract you sign when you get a debit card. After all, when you overdraft you are spending money that isn't yours- and who thinks the bank would let you use their money for free?

So what was Wells Fargo doing that was so uniquely terrible? They had a little trick called reordering. From the Vice News article:

The case centers on something called debit card reordering. Let's say you have $100 in your bank account, and you make three purchases, costing $20, $30, and $110. Under Wells Fargo account guidelines, the bank can charge you a $35 overdraft fee for taking out more than you have in your account. But by reordering the transactions from highest to lowest, putting the $110 charge first, the bank could charge three separate overdraft fees, one for each attempt to draw insufficient funds. Simply by altering the transaction order, Wells Fargo could make an additional $70.
This was once common practice from big banks, until it was a federal court said it was too shady. Wells Fargo, however, kept fighting hard for its right to keep preying on the poor.

How to Protect Yourself

You can't change the motivations of the big banks, and you can't make the courts move any faster. So what can you do?

Plan Accordingly

If there's one thing I know about money, it's that sh*t happens, and it always happens during rough times. When times are good, instead of celebrating, upgrading your lifestyle, or taking on more financial responsibilities, create a solid bank buffer first. This should be part of your Emergency Fund.

A bank buffer is a layer of cash that sits in your bank account which you do not touch. Depending on how much you spend, it doesn't need to be more than a hundred dollars or so, although a good rule is to make it at least one week of average spending. Just enough to keep you from overdrafting in case life gets away from you.

 Like the rest of the emergency fund, it may be hard to forego the things you otherwise would have spend that money on as you build it up (like eating at a restaurant, or replacing worn-out shoes). But once it's there, it really saves your butt. It not only saves you from paying overdraft fees, but also keeps you out of the payday loan store.

Some checking accounts charge you a fee if you do not keep a certain amount sitting in them. For my checking account, this amount happens to be my bank buffer.

Now, I'm not perfect. I am human, I screw up sometimes- and I've dipped into the bank buffer maybe a ten times over my adult life. But I have never had an overdraft fee.

When you build a system for yourself that includes safeguards when you're not perfect, the burden of being an imperfect person feels way lighter.

If you're a frequent overdrafter, consider taking bills off autopay until you figure your budget out. Frequent overdrafts are a giant red flag that you are spending way beyond your means.

Alternatives to Wells Fargo

If you've had enough of Wells Fargo's big-banky shenanigans, you're not alone. Lots of people are switching from big banks to credit unions.

How is a Credit Union Different than a Bank?

Since credit unions are owned by their members (as opposed to banks which are owned by investors), credit unions are less likely to pull shady garbage on you like Wells Fargo does.

Credit unions are not for profit, and their earnings are paid back to customers in the form of better rates and services like free ATMs.

Credit unions are local. This may make it rough to find a branch if you are travelling, but the local nature of credit unions means you support your community when you use one.

How do I find a credit union?

Visit and use their search feature.

How do I go about making the switch?

Consumer Reports has written a wonderful guide on how to make the switch.

Are these shady games enough to make you ditch Wells Fargo, are you staying by their side, or were you never their customer in the first place? Let me know in the comments!

1 comment:

  1. I've dealt with this with Wells Fargo, 5th/3rd, and Chase and I've been much happier with Simple! They have a good network of free ATMs, they're not local but they're saving money by not having any branches and there's no fees (it would be harder to overspend anyway because of how it's set up to help you keep track of your money). The only downside is it's hard to deposit cash and checks or transfers to other accounts take a while but they've been improving and adding good features like shared accounts!