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How can I protect my bank account from large, surprise withdrawals?

by Maxwell Peterson1 min read22nd Feb 202117 comments

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Today's Money Stuff describes large charges for electricity auto-withdrawn from customer's accounts:

Last week there was a brief surprising spike in the spot price of electricity in Texas... Prices went from something like $20 per megawatt-hour in early February to something like $9,000 last week... 

[A customer of an electric company] and her husband, Doug Robinson, 42, used less energy in February than they did the prior month. Still, their bill, typically around $100 a month, was more than $6,500 in 17 days. Because Griddy is connected to customers’ credit or debit cards to make automatic withdrawals, her credit card bill is now more than $2,500 — which she cannot afford to pay. She canceled her card before she could face more charges.

I called my bank (US Bank) to see if they could put in a rule to protect my account for this kind of thing, for example, allow no auto-withdrawals over $1,000 dollars. The guy on the phone said no - they could set up after-the-fact alerts about large withdrawals, but nothing for before the horse is out of the barn. 

My question: what are some ways to defend myself against this kind of large surprise withdrawal? I like the convenience of auto-paying, and would like to keep as much of that convenience as possible, but it looks like I will have to sacrifice some of it. I would have never guessed, if I lived in Texas, that I might be at the kind of financial risk described above, so I am looking for a method that doesn't require me to know a lot about what specific thing might be about to incur a large charge.

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Keep just barely enough money in your "auto-pay" account to cover the expected debits. If you don't physically have the money accessible, the worst that can happen is a couple of Insufficient Funds fees (one from the bank, and one from your creditor), and you can then deal with the charges at your lesiure.

Check with your bank on this - some types of accounts will pay the authorized transfers, and the overdraft fee is in addition to interest-bearing debt you've incurred by not having funds to cover.  This is very common if you have a credit card linked to the account.  They call it "overdraft protection", but it's not necessarily the protection you want.

The only way to be actually sure is to autopay on a prepaid debit card, and fill it with the maximum amount you're willing to pay.  Or just don't autopay, don't link your accounts, and write ol... (read more)

This type of bank account is sometimes called a "controlled disbursement account" (e.g. https://www.wellsfargo.com/com/treasury-management/payables/controlled-disbursement-account). It's often used by businesses. Other people have explained how to turn things into net 30 with a credit card.

Combined, you can maintain some control over the activity in your checking account.

Ahh - of course! Thanks!

I think there's two pieces of this that really deserve separate answers:

How can you set things up so that if you get hit with legitimate huge charges, you can handle it without all the money in your checking account disappearing?

Put everything on a credit card. This is US-specific since I don't know the details in other countries, but if you pay off your balance every month, this generally won't cost you anything. In some cases, companies will charge you a higher amount to pay with a credit card (since it costs them more). You can mitigate this in part by using a card that gives you cash back or points. Beyond that, I would just treat this as the cost of insurance.

The benefits of this are:

  1. You can pay the charge off over time (although you'll also have interest payments)
  2. If you declare bankruptcy, you might not have to pay the entire thing
  3. If the charge is actually fraudulent, it's trivial to reverse it

If you have the option, you can also turn off auto-pay. This will leave you the ability to put the charge on a credit card later, but you may also be able to negotate lower payment with the original company. For example, auto-pay for hospital bills would be a terrible idea because you can use the risk of bankruptcy as leverage to make the hospital either reduce your bill, or let you pay it over time without interest.

How do you avoid getting hit with legitimate huge charges?

I think the answer is:

  1. Choose fixed-cost contracts over variable-cost where possible (unlimited or subscription plans)
  2. If you make a variable-cost contract, ensure there's a limit to how high it can go (high deductable health insurance, anything with a maximum price)
  3. If you can't get a limit on the contract itself, try to limit risk some other way (buy third-party insurance, like with health insurance)

In the case of Griddy, the trigger to wonder if you're exposing yourself to more risk than you wanted it that they're passing on variable "wholesale rates". Similar things that should trigger your risk instinct are variable rate loans and overage fees.

I'm not sure if there's a general purpose way to avoid this, besides inspecting every contract you pay, but you could try to find general-purpose insurance. There's a thing called "umbrella insurance" which protects you from liability risk in general (assuming you're found liable for something but you didn't do it on purpose). There may be other financial products that insure against even more general risks. It's worth noting that the value of these depends on how much money you actually have though, since bankruptcy law caps your risk(at worst) at all of your money*, so it's umbrella insurance isn't worth it if you don't have very much money.

This is why I only use automatic charging for things where I can reliably know the general magnitude in advance.

Automatic: subscriptions (to magazines, software, Patreons, etc.), my mobile phone (for which the flat rate usually covers my entire usage), my ISP (another flat rate).

They bill me then I pay them: utility bills, credit cards.

I don't find it an inconvenience to make the manual payments. On the contrary, it is helpful to me to have this regular contact with what I am spending.

my mobile phone (for which the flat rate usually covers my entire usage), 

Generally knowing the magnitude of mobile phone bills in advance and actually knowing the bill is quite difference. Sometimes mobile phone bills get into high amounts due to bogus rooming charges.

3Richard_Kennaway4moThat depends on your deal. My roaming arrangement is capped at so many GB per week. If it looks like I'll need more, I buy more as I need it. No bad surprises. No bad surprises. A principle not only for money, but for life.
2korin434moIn the US, "postpaid" mobile phone bills where you use your phone and then get charged for your usage are the most common, but if you're worried about surprise bills, you can do prepaid billing instead, in which case instead of being extended potentially-surprising amount of credit, the expensive thing you're trying to do just doesn't work. They also usually make it easy to add more money to your account in case you really do want to do something like expensive international roaming.

As others have already answered better than I, first avoid being obligated for such large unexpected charges. The customer in the example may have canceled their credit card, but they are still legally obligated to pay that money.

To answer the actual question of how to put limits. You can use privacy.com They allow you to create new credit card numbers that bill to your bank account but can have limits both in terms of total charges and monthly charges. You can also close any number at any time without impact on your personal finances. It is meant for safety and privacy for online shopping. You set up a card for each service. For example, create a card with you auto-bill the electric bill to. Set a limit that no more than say $200 can be charged to it each month. Any transaction that would push it over that limit will be declined, even automatic payments you have scheduled.

I’d never heard of that site! Thanks

I'd be surprised if exactly what you want is possible.

To accomplish a similar effect, I keep the bulk of my assets with a large, reputable brokerage firm, and just leave the most recent paycheck's worth with the local bank. I can transfer to/from the bank and brokerage firm, and every other organization (employer, power company, credit cards, etc) only gets to know about the bank account. That limits the amount transfers can get ahold of. I suspect, but am not sure, that the brokerage firm doesn't even accept outside requests for transfers. I think all transfers in/out of them have to be initiated on their end.

Thanks - that's even better separation than using separate accounts at the same bank. More work, but something I hadn't thought of.

2uncomputable4moTo further detail the exact amount of effort: I get paid once a month, so once I month I go in, look at what I've got, subtract off my estimate for everything else, leave a few hundred dollars of slush, and come up with some excess amount. I then go over the brokerage site and issue the transfer for that excess. At the same time, I review the state of the brokerage account. I think it's pretty minor, and it gets my cash over to the brokerage firm where it can sit in a money market account. That pays a pittance these days, but it has been a significantly larger pittance than anything my bank would offer me for the last 15 years. (And then you've got access to a variety of bond funds, so you can easily transfer the cash into a fund which matches your exactly risk tolerance. Or otherwise invest it. All useful things to be doing, which your bank does not usually facilitate.)

Don't go around handing out blank checks, and you won't have to worry that someone will fill in a huge amount and try to cash it.

Really, that's what the people in Texas did - they explicitly signed up to a deal where the price per kWh could change without limit, and pre-agreed to pay whatever the rate was.

Because in theory on average it would be cheaper.

It's kind of like selling fire insurance - sure, you get this nice steady stream of premiums. But every once in a while, unpredictably, a house burns down and you have to pay for it.

It's fine to do that if you're an insurance company and have many customers, so you can figure out how many houses you can expect t- statistically - to burn down each month. AND you buy reinsurance (it's a thing) in case you're unlucky and all your customers houses burn down at once.

But it's dumb to just sell ONE insurance policy, hoping your customer's house won't burn down, if you can't afford to pay for it.

Don't do that. 

Auto-pay is fine for things where the amounts are reasonably predicable - your cable bill, say. Not for things that might vary a lot.

Your answer uses a fair amount of analysis and knowledge in order to avoid this kind of large charge. Maybe perversely, I was asking for methods that do not require analysis or knowledge about contract types. I also doubt that most customers of the Texas company had a good sense of the risk they were exposing themselves too - many might have followed the "scan list for lowest rate, then pick that one" method that I use sometimes.

I wonder whether anyone's confidence in our system has been slightly shaken by these events?