The cost of compounding error


Tyler Murphy

Recently I did one of those things I occasionally do when I’m juggling my finances by using electronic methods of payment with varying degrees of withdrawal times and penalties – I overdrew my checking account.

Although I technically over drew it once, chronologically the institution I’ve been a member of since I was in high school has this strange habit of processing transactions in priority of size instead of time.

Let me explain it this way: Say you have $50 in your account and late on Friday you purchase three items for a dollar a piece, then on Sunday you forget and buy an item for $50 with only $47 left in your account.

So you figure the bank will hit you with a single $35 fee (the going rate for overages at my bank). In reality, the bank will process the most expensive transaction first, taking out the $50 transaction then the following three one dollar charges, allowing them to hit you for $105 worth of overage fees instead of a single $35 fee for only over drawing your account by a mere three bucks.

I admit the original failure of miscalculating that 300 cents, but the compounding cost of error is a 3,500 percent mark-up of my mistake. Sounds like corporate highway robbery to me.

The next thing I learned is you can’t close an open account with the bank until the debt is paid. The second piece of information you should know is that after five days of having an account in the negative, the banks starts running the juice (slang for loan sharks in gambling) at five dollars a day, every day, forever, until a court steps in to halt the accumulating bill.

That means if some poor guy out there has some crisis and can’t pay his overages in five days the bank will keep piling up the $5 fees indefinitely until it’s paid in full. I didn’t ask but I wouldn’t be surprised to learn that each $5 fee tacked into the account also counts as an overage and they assigned another $35 to the over due bill. (There’s probably some excited banker somewhere who just went, “Hey can we do that?”)

I’ve never been rich, but I do tend to keep a close eye on my money, The less you have, the more it’s worth to you. If you’re making $350 bucks a week, a $35 overcharge is 10 percent of your entire paycheck. Three is a third of it.

It used to seem easier, but more and more I find myself using the plastic cards for more convenient and timely bill paying; most utilities prefer electronic deductions.

I’m told that debit transactions are immediate and credit card transactions are a roll of the dice – could come out sooner or later. Either way, there’s no guarantee from the bank that your account will actually represent its real total up to two days after a purchase. (News to me).

OK, so I submit I’m handling too many variables in the world of finance to consistently get things straight it seems, so I ask about a possible guard, or something that could automatically halt me from taking out money I don’t have.

First thing to know is that no matter how much or how many times you’ve overcharged your account, the bank’s ATM will keep letting you take out money. So say my account reflects a number (not my actual cash in the account, remember the two-day delay?) I could keep buying and charging my way into debt and not even know it.

Again, fine I should know better. It’s my money I’m spending; I should know how much I have. It’s just these tools I’m being offered seem more likely to confuse me than anything else. I’m really just better off keeping a paper tally of what I buy. Of course now I’m starting to wonder what I need a bank for.

So back to what I wanted – a fail safe measure to prevent me from over charging. I discover there is indeed a program in place to help avoid such a thing, but there’s a catch-22, you need to pass a credit check. I don’t, which surprises me considering I didn’t think my credit was all that bad. To be clear, those people who are economically struggling and of lower credit to begin with, the people who could benefit the most from a guard, aren’t eligible because they by definition lack credit. I’m betting that group of people also happens to generate most of the bank overage fees, too.

I’m obviously lacking the skills needed to be a banker, but I can still tell you what the sum of all these parts add up to and it’s not the customer’s interest, it’s the bank’s. The smaller of a role you have in it, that is the less money you have, the more difficult it becomes for you to be a member.

Let’s not forget that all this seems reasonable until you stand up from the table and find yourself paying the bank $105 because of three dollars. No matter what you find in between, my errors included, that’s math I do not understand.