Something that has been in the news quite a bit lately, is the high dollar amount that banks are getting for overdraft fees that they charge their customers. People are evidently shocked about the amount they owe as a result of using these supposed services. So let’s cut through the nonsense and educate ourselves on what is really going on.
What Is Overdraft Protection?
Overdraft “protection” is a service offered by banks that allows transactional account holders to temporarily make purchases even if they don’t have sufficient funds in their account to cover them. Basically, the bank will cover you if you happen to spend more than you really have. This can happen for any number of reasons; mistakes happen.
Example: Let’s say that somehow, you lost track of the dollars you had available in your account. We’ll run this two ways: with and without overdraft protection. For this example, let’s say that you let your account get down to about $20. However, you decide to take your significant other out to dinner and a movie.
With Overdraft Protection:
Your bill at the restaurant is $40; the transaction goes through. Then you go to the movie. First you buy the tickets at $24 for both of you; the transaction goes through. Then you went to the concession stand and ordered $20 worth of candy and drinks. Again, the transaction goes through.
Let’s say your bank charges $30 for overdraft protection, how much did you really spend? Some might think they would have paid $114, but it would actually be $174. If the base cost for the night was $84, you’ve now spent over twice that due to overdraft privilege. This is because most banks charge their fee per item. Most banks also have a cap on how many fees can be assessed in a single day. What you need to understand is that the total possible cost in overdraft fees alone can get into the multiple hundreds really fast.
Without Overdraft Protection:
Your bill at the restaurant is still $40. You run your card but the waiter informs you that the card could not be processed and asks for another form of payment. Hopefully your date is cool about stuff like this. Embarrassing perhaps, but definitely much safer and cheaper.
Many consumers are unaware that every time they overdraw their account, they are going to be hit with an overdraft fee. Oddly enough, most people “opt-in” to this type of service not fully understanding what it could mean for them. Even if you do know understand the basic concept and decided not to opt in, it is important to note that a banking institution does not need your opt-in permission to charge an overdraft penalty on non-sufficient funds of paper checks or automatic electronic billing payments.
What Can I Do To Avoid Such Fees?
Understand that overdraft fees are a regular source of income for banks, generating billions in revenue for financial institutions each year. Chase Bank and Citibank for example, charge $34 per item. Bank of America and Wells Fargo charge $35 per item. Friends, this adds up and it can get away from you quickly. So what can you do to protect yourself from becoming a donor to that fat purse?
The best way to avoid overdraft fees is stay on top of your finances. Don’t spend more than you have and know how much you have by either diligently balancing your check book, using electronic tools that help you track, or simply logging in to online banking to check your balance from time to time. In fact, at the credit union I do business with, I can set up alerts that text me when my funds drop below a certain level.
The second consideration would be to simply not opt-in to such services in the first place, or open accounts that do not allow for overdrafts. If you don’t opt-in for overdraft protection, transactions that are attempted but cannot be afforded will simply be declined and the bank cannot charge you a fee (minus the exceptions already mentioned). Embarrassing at times perhaps, but much cheaper.
Call your bank as soon as you can. Find out if you are enrolled in an overdraft protection service.
Find out what they charge for overdraft protection. Find out the “per item fee” as well as their “maximum fees per day”.
Find out if they have offer “free” overdrafts. Some institutions (especially credit unions) offer certain leniencies that do not charge the customer or member if a simple mistake was made. It’s sometimes referred to as “overdraft forgiveness” or “friendly overdrafts”. If your institution has such a policy, it may include so many free overdrafts per year or they may not charge if the overdraft is under a certain amount.
Then do the math. For example: Fifth Third Bank (at the time of this entry) charges a $37 overdraft fee per item with a maximum fee per day of 10. This equals $358. If this is acceptable for you, then so be it. If it’s not, it might be time to opt out or start shopping for a new institution.
If you find yourself in a position where you are simply not happy with your bank, then it’s time to move. These may seem like a tedious or even frustrating task, but it might be worth it. Thanks to technology, it’s becoming even easier. Some banks and credit unions now offer services which will help you switch your automatic bill-pay accounts and so on.
Of course, I’ve alluded to it a couple times so far in this article and I will make it clear now; explore credit unions. Credit Unions and banks are simply not the same for a variety of different reasons. For this article’s purposes, it’s important to know that credit unions are there to help you, not exploit you. It just might be that a credit union is your best bet. At the very least, it doesn’t hurt to consider or shop them in your search for a new institution.
The Case FOR Overdraft.
Normally, I would not advocate for services like overdraft protection. Clearly, if it has become a multi-billion-dollar service, there are quite a few people who are using it wrong. However, in the spirit of being fair and balanced, I must admit that there are times when such a service can work to your advantage. If you are good with your finances but low on cash, overdraft protection can be a good thing. This is because an overdraft fee is (in many ways), a better alternative to the dreadful “Payday Loan” and sometimes even better going through the hassle of securing a personal loan.
Payday loan providers typically charge about $15 per $100, but the charge can range anywhere from $10 to $30 for every $100 borrowed. Pretending you had a $500.00 car payment to make but were short on funds and only days away from a payday, which should you choose? At this point, a $20 or $30 overdraft penalty is much cheaper than the typical $75 fee you’re going to pay to a payday loan provider.
Thinking personal loan? Not so fast! With a personal loan, there are often minimums and maximums that are borrowed. Plus, many institutions not only charge interest on the loan, but they also charge an origination fee ranging from 1-6%. Understand that this charge is actually wrapped up into the total amount borrowed, which of course increases the amount you pay each month when you factor in the interest. So if you were going to borrow that same $500 from your bank, you would be paying the interest rate on the loan over an extended period of time and you would also be paying an extra $5 to $30 anyway. So if your institution charges a $20 overdraft fee, it still might be cheaper to accept that hit, and you would miss the formalities and time investment of applying for the loan that they might turn down anyway.
Regardless, no matter which way you go and no matter which type of institution you choose, here’s the lesson: think about what you’re doing and keep a hawkish eye on your money.
Oh… and here’s another tip. If you have an ATM card, you might want to reconsider that too. ATM fees are another billion-dollar service used by the big banks to rake in loads of cash. These fees are steadily rising too. To avoid these fees, bank with an institution that doesn’t charge such fees, or use your institution’s ATM network exclusively, or consider using only free ATM’s or getting a debit or check card instead.
Now, I would be remiss if I didn’t share the following. If ATM’s are your thing, then this might be where a credit union can do some good for you too. Many credit unions participate in something called a “CO-OP Network”. It’s basically this enormous credit union-owned, surcharge-free ATM network, offering the convenience of nearly 30000 ATM’s coast to coast. Just something to consider.
Here’s to your financial success!
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