Overdraft Fee? the 3 things that decide whether it gets reversed

The payment that buys you nothing

Every credit card balance has a number attached to it that almost nobody works out: the payment at which you get nowhere at all.

On $5,000 at 24.99%, that number is $104 a month. Pay exactly $104 and a year later you still owe exactly $5,000. All of it went on interest. Nothing was paid off — and from the outside, twelve payments made on time every month, it looks like you're doing well.

Working it out is simple: multiply what you owe by the interest rate, then divide by twelve. It's the most useful number in this track, because it turns a vague worry — this debt never seems to go down — into a line you are either above or below.

Above the line and below it

What makes that number matter is what happens as you get near it. It isn't a gentle slope. It's a wall:

Cutting the payment by 45%, from $200 to $110, doesn't make it take 45% longer. It makes it take four times as long and cost five times as much interest. And a bit further down, at $104, it stops being a slope at all. Below that line the balance grows by itself, forever, while you make every payment on time.

This is the most important thing to understand when money is tight: it isn't a question of degree. There's a line, and life is completely different on either side of it.

What the charges actually do

Now put the last two chapters against this one.

A household with $200 a month spare, owing $5,000 at 24.99%, is above the line and clear of it in three years. Now give that household the charges people at that level actually pay — about $380 a year for going overdrawn, roughly $180 in card late fees, roughly $240 in late rent charges, so about $800 a year, or $67 a month — and the $200 becomes $133. Still above the line. But clearing the debt goes from 36 months to 74, and the interest from $2,135 to $4,823.

That's the typical case, and it's bad enough: the timing problem roughly doubles both how long the debt lasts and what it costs.

Now bank that same household at Wells Fargo or Regions, where one bad morning costs $105. Twelve of those a year is $1,260 — $105 a month — leaving $95. Below the line. Same wages. Same spending. Same debt. The balance now grows forever.

If you have $200 a month spare, charges of $96 a month are enough to tip you over. One bad morning a month at a $35 bank does it. The same morning at Bank of America costs $20 and doesn't come close. At Capital One it costs nothing.

It gets worse by itself

The reason this doesn't stay a timing problem is that the charge comes out of next month's money. A $150 shortfall causes $65 in charges; next month starts $65 further behind, so the shortfall is $215; the charges grow with it. Left alone for a year, being $150 short once turns into a hole of well over $1,500 — with no change in what you earn or what you spend at any point.

Real accounts don't follow that all the way. They get written off, and the debt goes to a collection agency, and often to a court judgment and money taken directly from wages (“It Won't Happen to Me”? the 3 things that break households). Which is the honest end of this chapter: it doesn't run forever, it runs until something breaks, and what usually breaks is your credit record for the next seven years.

Three things this changes

Each of these contradicts something commonly said:

Small charges are not small. $67 a month is nothing against $3,200 of wages and a third of $200 spare. The number to compare a charge against is what you have spare, not what you earn — because what you have spare is the only money that does anything. The same $130 is 1.4% of a $9,000 income and more than all of the spare money of a household on $2,400.

"Just pay a bit more" has a cliff in it. Between $95 and $110 a month there's no such thing as "a bit more" — one of them is forever and the other is twelve years.

Fixing the order of your bills can be worth more than a pay rise. Getting rid of $105 a month of charges takes a household from never to 36 months. A $105 pay rise does exactly the same. The difference is that the pay rise needs your employer to agree, and the other one needs two phone calls.

Worth saying: this arithmetic works the same at any income, because the number scales with what you owe. But a household with $2,200 spare against a $5,000 balance is so far above the line that no realistic set of charges could push it under. The line only really exists for people whose spare money each month is within a few hundred dollars of what the interest costs. That's who this track is written for.

Where Plenee fits

Plenee knows what you owe and at what rate, so it can work out the payment that gets you nowhere without you having to do anything — and how far your actual spare money is from that line. That turns the vaguest worry in personal finance into a gauge with a needle on it. And because the charges are visible too (A Missed Card Payment Averages $26.77, According to CFPB Data: the 2 charges to know), it can run the projection both ways: here's when you'd be clear, and here's when you'd be clear if the $800 a year of charges stopped.

The takeaway

Work out the payment that gets you nowhere — what you owe, times the interest rate, divided by twelve — and find out which side of it you're on. If you're anywhere near it, the charges aren't an annoyance, they're the thing deciding the outcome: getting rid of them with two phone calls and a change of bank is very likely the difference between clearing this debt and paying it forever.