Let’s say you’re one of those people who execute many bank transactions a day: you make and you receive a lot of payments from/to your bank account. Naturally, at one point, you might run into one of the following situations:

• You make a payment from your account, taking your balance to a below-zero figure, and then immediately receive a payment to your account, taking your overall balance above zero.
• You make several consecutive payments from your account, where the first payment lowers your balance to below 0, and then make a payment later in the day that will take your balance above 0.
• You make a big payment to your bank account, and then make several small debit transactions while still maintaining your account above 0.
• You make several small payments to your bank account, and then make one big debit transaction while still maintaining your account above 0.

The reason for you to be worried because in any of the above scenarios, you are at risk of being hit with an overdraft fee, often more than once, and that’s why you want to know how banks process your payments.

The first thing to know is that each bank has its own method of processing payments – most banks use methods that are optimized to maximize their profits. Let me list all the commonly used methods and how they work:

Method #1: Transactions Are Processed in a Chronological Order: In this situation your bank is fair. So, let’s assume you had $50 in your account. You bought a cup of coffee for $5, and then you went to an electronic store and bought an iPad for $500, and then you funded your account with $600. In this case, your bank will charge you an overdraft fee because at one point during the day, your balance went below 0.

Method #2: Debit Transactions Are Processed First: In this situation your bank is a thief. Let’s say you have $30 in your account, you make a payment of $100 to your account, and then you go and have dinner with your significant other for $40. The bank will first process all the debit transactions, and then all the credit transactions. Which means that in your case, the bank will process the $40 payment for the dinner first, which will lower your balance to -$10 (which means that you will be hit with an overdraft fee), and then it will process the credit payment of $100.

Method #3: Large Transactions Are Processed First: In this situation your bank is a transaction manipulator. Let’s say you have $30 in your account. You then fund your account with another $30. You then make a purchase of $50. The bank will take your largest transaction, and then process it first, and then process the second largest one, etc… Which means that the first transaction to be processed is the $50 purchase (lowering your balance to $20, and thus charging you with an overdraft fee), and then the $30 payment is processed. It has been reported that this method is used by most banks in the US and that this practice is currently under investigation by the current administration.

Method #4: Small Transactions Are Processed First: In this situation your bank is also a transaction manipulator. Let’s say you have $10 in your account, and that you fund your account with $100. Later in the day, you have lunch with a friend for $20, and then buy a small gift for $30 for your nephew. If the bank is processing small transactions first, then the first transaction to be processed is the $20 for your dinner with your friend (lowering your balance to -$10), and the second one is the gift purchase (lowering your balance to -$40), and the forth one is the $100 credit payment (upping your balance to $60). Now since debit payments are mostly small payments, and credit payments are mostly large payments, then this method can really ding you with multiple overdraft fees constantly if you’re not careful.

Method #5: Transactions Are Summed by the End of the Day: In this situation your bank is very, very fair. The bank will calculate your balance by the end of the day, and if it drops below 0 (regardless of the order of the transactions), then you will be charged an overdraft fee. If it doesn’t, then you’re safe. Note that this method is also the best because you will only get charged an overdraft fee once, regardless of the number of times you went below your balance during the day.

I have noticed that if you call the bank immediately about the overdraft fee, they can waive it for you if it’s the first time. Overdraft fees are really heavy, and for buying a small bar of chocolate that is worth no more than $1, you might be charged an overdraft fee of $45 (that’s one expensive chocolate which probably wasn’t bought at one of these duty free outlets at your local airport!).

Banks are really artistic when it comes to charging you overdraft fees, and you usually are charged overdraft fees as many times as you go below your balance according to their calculation. As a rule of thumb, try to have at the beginning of the day enough funds to cover for all of your purchases and other debit transactions throughout the day, regardless of the credit transactions that you will make – this will ensure that your account will not be dinged with exorbitant fees everytime you make a debit transaction.

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