How to avoid paying bank penalty fees

There’s a growing awareness of the value in questioning bank penalty fees, and many people have been successful in getting them reversed. Here’s what you need to know.

Bank penalty fees can be charged in a range of circumstances where your account could be classified as "dishonoured". For instance, if you've ever had a payment rejected, gone over your account limit or missed the due date on your credit card statement, there's a good chance you've had to deal with bank penalty fees.

While these fees are usually one-off additional charges, they can quickly add up. What's more is that if you're charged a penalty fee on your credit card, it will start accruing interest from the time it is applied.

Here, we look at the most common bank penalty fees and when they may apply so that you can avoid them as much as possible.

What types of bank penalty fees may be charged?

The range of penalty fees that could apply to your credit card or other bank accounts varies depending on your financial institution. But some of the most common include:

• Periodic payment dishonour fee. This fee may apply if you have set up a periodic payment or a regular direct debit from your account and the payment is declined due to insufficient funds.
• Credit card late payment fee. If you don't pay the minimum amount required by the due date on your statement, this fee may apply to your account.
• Credit card overlimit. This is when your credit card spending exceeds your set limit. Following the 2012 credit card reforms, this fee can only be applied to accounts that were opened before July 2012.
• Overdrawn account fee. Similar to a credit card overlimit fee, this charge applies when you write a cheque or make a debit card transaction that takes your account overdrawn.

Other bank penalty fees that may apply to your accounts

These fees are less common than the ones above, but are still worth keeping in mind:

• Outward cheque dishonour. This is when you write a cheque that is not covered by sufficient funds at the time the cheque is presented for payment, thus the cheque bounces.
• Inward cheque dishonour. This bank penalty fee applies when someone else writes a cheque to you but their account does not contain sufficient funds to cover it at the time you present it for payment.
• Stop cheque. This happens when you have written a cheque and given it to someone then decide that you want to cancel it. If the cheque is presented for payment after it has been stopped, you may be liable for another fee.

How much to bank penalty fees cost?

The cost of these charges largely depends on your bank and the specific account you use. In general, most penalty fees range from $4-$35. To give you some idea of the charges that could apply, the table below shows what penalty fees Australia's major banks ANZ, CommBank, NAB, St.George and Westpac may charge and how much they cost.

Note that these penalty fees may not be applied to every account you have. Each lender has its own set of account terms and conditions, so it's important to refer to your credit card or bank account Product Disclosure Statement for full details of which fees you could be charged and how much they will cost you.

Avoiding the penalties

Here are some ways by which you can guard against being hit by bank penalty fees:

• Compare products. If you're looking for a new credit card or bank account, comparing several options will help you find one with the fewest fees, or at least with the lowest charges.
• Contact your bank. If you are charged a penalty fee that you fee is unfair, you can contact your bank to query penalties and challenge them. Ask that they be reversed. This has proved very successful for many consumers.
• Read the fine print. It's important to go through your credit card or bank account Product Disclosure Statement so that you know when fees may apply so you can reduce or avoid them.
• Know the state of your accounts. Make sure you know how your income stacks up against your expenditure, and never assume that money due has entered your account without checking first. Regularly review your account details so that you're aware of what's going out and coming in for each account. This will allow you to budget accordingly and could help you avoid penalty fees as a result.
• Set up autopayments. Most banks let you set up automatic payments for your credit card accounts. You can nominate to have the minimum amount, full amount or a dollar figure regularly deducted from your transaction account before the due date. This will reduce the risk of late payment fees.

Campaigns for fairer bank penalty fees

Over the past few years, bank penalty fees have come under scrutiny by various industry and government bodies. There have been class actions filed against many of the major banks, as well as campaigns from consumer advocate groups.

These campaigns have argued that bank penalty fees are excessive and may not even be legally enforceable. From 2007 onwards, campaigning around penalty fees gained more public attention, with the pressure resulting in all of the major five banks reducing their fees.

Then, in 2012, the credit card reforms also banned overlimit fees on credit cards. This means, if you got your card after July 2012, you won't get a bank penalty fee for going over your credit card account limit. But for cards activated before the reforms, you could still be charged by some banks.

Balancing penalties against costs

The disparity between what it costs the bank to rectify the problem, and how much is charged to the customer for the inconvenience, has been a cornerstone of campaigns against bank penalty fees. Some of the other main views of contention have included:

• The banking industry maintains that its costs are commercially sensitive and thus cannot be released.
• There is no evidence available to the public that would support or refute how fair these charges might be, and if they relate to the actual costs borne by the banks.
• The actual figures for these penalty charges are murky, because banks in their annual reports do not separate out penalty charges from those that are levied for using ATMs and for maintaining customers' accounts.
• Although estimates by the Consumer Action Law Centre and other consumer action groups always suggested that these penalties were worth hundreds of millions of dollars to the banks each year, in May 2009 the Reserve Bank of Australia published the true value of these bank penalty fees for the first time. In fact, they made the banks nearly $1 billion in 2008.

How the Bankers' Association responded

In 2007, the Australian Bankers' Association (ABA) replied to its critics regarding accusations that bank penalty fees were unfair and possibly illegal. It said:

"We recognise that there has been extensive community debate about these fees. The ABA's member banks are reviewing their terms and conditions on relevant products."

Since then, the ABA's member banks have been more open about their penalty fees – commonly referred to as "exception fees" – which has certainly allowed for a more informed choice of banks and banking products for consumers. The ABA did defend their stance somewhat, saying that their exception fees are perfectly avoidable if customers pay more attention to the state of the bank accounts so that their transactions remain within limits.

Historic comparison: 2008 bank penalty fees on standard accounts

To give you an idea of how much these campaigns have changed, we thought it would be interesting to look at how things stood in 2008. At this time, fees were still on the rise.

According to the Reserve Bank of Australia, from 2000 to 2008 credit card late payment penalty fees rose from an average of $20 to $31, whilst credit card over-limit fees rose from $0 to an average of $30. As of May 2008, these were the bank penalty fees charged by the five major banks:

The penalty fee situation overseas

Bank penalty fees are not an issue that's limited to Australia. In 2006, the UK's Office of Fair Trading (OFT) investigated credit card charges and decided that they were at a "significantly higher level than is legally fair"￾, with the illegal portion of fees totalling £300 million (over $700 million). The OFT advised credit card companies that it would consider anything above £12 (around $29) for a penalty charge to be unfair. As a result, UK consumer action groups have seen thousands of consumers recoup their unfair losses from the banks.

However, whilst in the UK the OFT has the power to make these investigations under the Unfair Contract Terms laws, the only place in Australia where similar legislation exists is Victoria. In New Zealand, the Commerce Commission is also investigating credit card late payment fees, which, under New Zealand law, must be "reasonable".

Bank penalty fees can be a nasty surprise if you're not aware of them. But understanding what these fees are and when they may apply to your specific accounts will help you avoid and reduce these costs. Meanwhile, looking at the history campaigns against penalty fees can provide you with the insights and resources you need if you ever want to contest a charge on your accounts.