Automation can save you from overdraft and late fees

August 24, 2011

When Mint.com launched in 2007, it was one of several Web-based attempts to get people to look at all their financial accounts in one place. For budgeting and planning that kind of overview is essential, and people flocked to sign up.

After a few shakeouts in the marketplace, Mint was aquired by Intuit and ended up the big winner, building to a base of six million users and counting. But one piece was always missing – bill reminders. Little bits of it appeared along the way, but there was no coordinated system. Finally, it’s here, and none too soon: Mint says its users spend $5 million a month on bank fees.

A one-time $35 overdraft fee won’t put a ding in most people’s finances. But add that up across millions of account holders and it’s a pretty big chunk of change – projected to be $38 billion nationwide in 2011. Add to that credit-card late fees, late mortgage payment fees and even extra charges when you turn in your library book a few days after it’s due, and you have a huge problem of people paying out too much money for simply managing their obligations poorly.

“Overdrafting is more predominant with people who are living check-to-check, but I know plenty of people making six figures who continually overdraft,” says Ramit Sethi, author of I Will Teach You to be Rich. “Living check-to-check is more necessity on the lower end up the incomes, but as you go up the scale, it’s more negligence.”

Sethi says that while some people like to actively manage their accounts, you can stay out of trouble easily if you automate everything. That’s where services like Mint’s new bill reminders service comes in, as well as various iPhone money management apps, Google calendars, Yodlee Money Center, bill alerts from banks and credit card companies like PNC Bank’s Virtual Wallet and other electronic reminder services like having your bank pay your credit card minimum on a certain day each month. You’d think that with all this digital help, people would get a better handle on their money, but they haven’t yet.

“It’s about behavior rather than attitude,” adds Sethi. “People know that they shouldn’t miss payments. They are educated that overdraft fees are bad. But they do it anyway.”

And it jams some people up completely. Get almost anyone talking about fees these days, and you get a rant about complicated bank procedures and tricky credit card rules, even from people who consider themselves financially responsible with steady income and no debt problems.

One thing that’s happening these days is that the $35 overdraft fee or the one-time late payment fee on a credit card bill sends a person spinning into a vicious cycle of fees where they compound on top of each other. Overdraft just once, and all the subsequent checks in that cycle also overdraft and pick up their own $35 fees. Miss a credit card payment by one day and you could pay interest charges for months, not to mention get dinged with a higher interest rate. Miss a mortgage payment and you could damage your credit score for a long time to come.

Marie, who runs an Internet marketing company in Wichita, Kansas, (and did not want her last name used) found this out the hard way. As a small business owner, she doesn’t have consistent cash flow, but she’s successful enough to never have been behind on her payments. She puts money in the bank and writes checks to cover expenses. The money’s all there, or so she thought.

After a storm damaged her roof, she got an insurance check to cover the repairs. Pretty standard financial transaction? Not really. “I deposited an insurance check, and then wrote a check to the roofer. But the bank put a hold on the deposit, so the check to the roofer bounced,” she says. Until it got straightened out, other checks overdrafted, too. “I was in tears, pleading with them to do something.”

While she got them to take off half of the charges, she still ended up owing hundreds of dollars. Then she got caught in a bad cycle with the bank, where every time she deposits money, they put a hold on it, and then when she writes checks they bounce. In 2010, she paid $1,226 in overdraft fees. In 2011 so far, she’s paid $805.

“It’s is a freakin’ nightmare when you get in that downward spiral,” she says.

For people who have cash flow problems like this, Sethi suggests building up a cash reserve cushion in a bank account.  Then you can follow through the other steps he recommends for people with regular paychecks, which is to set up automatic payments to all your bills so that even if you got hit by a bus, you wouldn’t miss a payment. You can also sign up for various forms of overdraft protection, and there are new protections against overdrafting while using your debit or ATM card, but these are not fail-safe methods.

“Some people like to control their finances actively, but then they get bored,” he says.

That automation is what Mint is trying to do with bill reminderes, which can keep track of all your bills and put them in a calendar view, and you can tie that to a bank account so you can see if you have enough money to cover the expenses.

“Part of the reason we built this is that a lot more people are hovering around zero in their checking accounts. Short-term cash management is increasingly needed,” says Aaron Forth,  vice president and general manager of personal finance for Intuit. “We want to help people to write checks that can be cashed. It’s not that they don’t have the money, it’s that they don’t have money in the right account at the right time.”

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