As we leave the holiday and gift-giving season behind us, we find that something has followed us out of that season. Our bank accounts are still nagging us, reminding us that we had a few overdrafts. Quite often, banks will market their overdraft protection, hawking it as a way to handle occasional mistakes in math or budget hiccups. But, there are far too many consumers who don’t realize exactly how overdraft protection works, and they end up using it as a high-interest loan.
How Does Overdraft Happen?
You overdraft your account when you spend more money than you have in the account – BUT – the bank covers the purchase.
That sounds really nice, doesn’t it? But the flip side of that coin is that the bank charges you for that service. Most of them charge $35. This is how a latte from Starbucks can cost you $39. Some studies show that bank customers pay $17 BILLION in these overdraft fees, every year. Most of this money is made in the last quarter of the fiscal year, with the first quarter of the year having the lowest amount of overdraft fee income for banks.
Federal regulations state that each bank customer must give permission to the bank to provide overdraft coverage, thus activating the overdraft charge. These charges will take place for purchases you make with your debit card as well as ATM machines.
If you do not opt into the overdraft protection, you won’t be charged the $35 fee every time you spend too much money. This may work fine when you are using your debit card to make a purchase, because it will simply be declined. However, if you have online drafts or pay bills online, these will be rejected by the bank. The ensuing melee of “insufficient funds” and “returned payment” and “returned check” charges can amount to far more than the $35 overdraft fee. You should check the full list of overdraft fees by bank to understand what you’re paying.
Surveys done by Pews Charitable Trust show that three-quarters of customers do not realize they can opt-in to overdraft protection. Those who do often don’t understand how it works. They don’t realize that they will pay a hefty fee if they overdraft their account. Overall, the opinion is that banks don’t do a very good job of explaining overdraft protection.
The Pew foundation has recommended that banks, rather than either charging an overdraft fee or allowing a purchase to go to collections, should make loans. Small loans of no more than 5% of the customer’s paycheck could be extended to the customers. Banks have indicated they are willing to make such loans their policy, if they receive clear regulations from the feds.
How Can You Avoid Overdraft Fees?
The best way to avoid overdraft fees is to opt out of the service. This means that when you run out of money, your debit card won’t work. This is fine for people who do not have scheduled payments on their bank account or those who do not write paper checks. Without overdraft protection, you pay no fee for a rejected card purchase. Some banks even have will even waive the fee if your overdraft is less than $10.
Keep in mind that if you DO have bank drafts for recurring bills, such as car insurance, cable, or cell phones, it will cost you BIG if you run out of money before those bills are drafted.
If you do have overdraft coverage, you can ask the bank to drop it at any time.
The Consumer Financial Protection Bureau has some suggestions for managing your account to avoid overdraft fees:
· Sign up for low-balance alerts. You will receive an email or text if your balance reaches a low point. Apps such as Coover provide this service.
· Smartphone apps make it easy to log into your account to check it.
· Link your savings account to your checking account. The bank will automatically transfer money from your saving to your checking, covering your purchase. There is usually a transfer fee for this, but it should be less than an overdraft fee.
Changes on the Horizon
The Consumer Financial Protection Bureau began, last year, to test new documents used to explain overdraft protection. The goal is to help customers understand their options. Nothing has become official, yet. It seems that more and more apps dealing with overdraft fees are popping up. This blog https://overdraftapps.com reviews and rank them all.
In short, you might as well plan on adding overdraft fees to your holiday expenses. If you spend more money than you have, you will either have overdraft fees or insufficient funds fees, both of which will quickly drain what resources you have remaining.