Overdraft protection began as a service banks offered to help customers avoid embarrassment if they accidentally overdrew their accounts. The bank would pay the difference between the customer's checking balance and the purchase price, then the customer would pay a fee for that service as well as the necessary funds to make the account solvent once more.
This civilized concept has been taken advantage of as banks continued to raise fees and zap you with multiple charges on the same overdraft. Reform efforts recently enacted in order to halt the fees and protect consumers are more confusing than helpful.
What the Reforms Change
The new overdraft protection reforms require that customers opt-in to overdraft services before the services can be applied to a customer's account on certain types of purchases. If the customer does not choose to join the overdraft protection program, any purchases that would put the checking account below zero would simply be refused at the register. No overdraft fees would be assessed, but no purchases would be possible until the account was made solvent again. This simple concept can become complicated when you consider the things that it does not address.
1. How Overdraft Protection Helps the Bank
Overdraft fees can turn a small purchase into a huge investment. The fees that banks charge for even a small overdraft are generally around $35. Additional fees can be charged for any additional purchases made while the account is below zero. If the customer does not keep track of his or her accounts, the overdraft could last for several days before the bank's mailed notification arrives. This could create hundreds of dollars in fees for small purchases over a few days.
2. Small Percentage of Customers Impacted
The new reforms only apply to purchases that are made directly with a debit card or money that is withdrawn from an ATM. Overdraft services can still be applied to any scheduled bill payments or purchases made with a paper check. In essence, the reform will protect people who do not keep track of their expenses and tend to overdraw on a regular basis. A recent study indicates that only 13 percent of banking customers fall into this category. The other 87 percent of banking customers will probably not be helped at all.
3. Overdraft Protection May not be What You Think
As it turns out, there are four types of withdrawals for a checking account that can result in an overdraft charge:
- ATM withdrawals
- One-off card purchases
- Scheduled bill payments
When you sign up for a bank account, you must "opt-in" before the bank will cover overdrafts. If you refuse overdrafts, the bank cannot charge them. However, this only applies to individual one-off purchases and ATM withdrawals. It does not protect consumers from overdrafts from checks and scheduled bill payments.
You must take the initiative and ask the bank not to cover checks and scheduled bill payments or they can result in overdraft charges, even if you never opted-in. Banks make sure they can take advantage of this by requiring that customers wait 30 days they cano pt-out on these charges. Most consumers won’t remember to follow up on opting out.
Why it is Wise to Resist Overdraft Protection
It can be tempting to opt-in for overdraft protection. The idea of a clerk handing your card back to you because of insufficient funds can make the strongest among us weak in the knees. But the costs are much higher than a potential red-faced moment at the checkout stand. A $35 fee for a $5 coffee purchase would mean that you just paid $40 for a cup of caffeine. If you buy anything else before you realize you are overdrawn, your fees could become astronomical by the time you become aware of the problem. Unlike a regular bank loan, these fees are due immediately. Avoiding this spiral of instant debt is worth the risk of being declined for a purchase.
Don’t Worry the Banks Won’t Lose Money
Remember the foul cries that banks would be installing new fees to make up for all they lost in overdraft fees? The truth is that banks are booming right now. In fact, they barely blinked from the economic downturn. One or two fumbled, some failed and the rest shrugged it off. Now, they get to charge your overdraft fees in a sneakier way. You can opt out of overdrafts only to get one anyway when you fail to realize you need to opt out of four separate types of overdrafts!
Heather Hollingsworth is a single mother raising three teenagers while she attends graduate school and feeds a budding freelance writing career. She's always looking for a new way to stretch a dollar as far as it can go!