We all get busy and, sometimes, we may not know exactly how much money we have
in our accounts. In that case, it's easy to write a check or make a debit card purchase
for more money than is available. If you have overdraft protection, the bank will go
ahead and allow the purchase. This may save you some embarrassment, but it comes
at a cost. Consider this example:
You believe you have about $100 in your account; in reality, you have $50. During one
day, you make several small purchases with your debit card. The first is for $5, the
second is for $15, the third is for $12, and the last purchase is for $45. The next day,
you discover your error, but you have overdraft protection and you think being $27
overdrawn is no big deal. But, here is how the bank is likely to handle your account.
At the end of the day, the bank subtracts your purchases from your balance. You may
think that the purchases will be subtracted in the order that you made them (from first
purchase made to the last purchase). That is wrong. Banks are allowed to subtract
the highest purchase first.
Your bank subtracts the $45 from the $50 balance. Great, you still have a
$5 balance… you're not overdrawn yet. But next, they subtract the $15 purchase
from the $5 balance. You're now overdrawn. Then, they subtract the $12 purchase,
followed by the $5 purchase. You're $27 in the red.
If you think that you'll pay one overdraft fee for that $27 amount, you'd be wrong.
The bank will charge you around $34 for each transaction that occurred where you
didn't have the money in the account to cover the purchase. Since the bank subtracted
your purchases from highest dollar amount to lowest, you were overdrawn three times.
This is how it looks to the bank: