Overdraft Protection Is A Good Thing

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The NYT Bucks blog published a post today warning us that banks will start direct mail promotions to get customers to opt into their overdraft protection. While they don’t explicitly say overdraft protection is a bad thing, they do want to help protect against some fear mongering on the part of banks. I think that’s a good thing, we need to keep banks in check, however I also think that opting into overdraft protection is a good thing.

It’s no secret that banks make a ton of money off overdraft fees but it’s one of the fees that you are 100% responsible for. It’s like over-the-limit fees by credit cards, it’s 100% your fault that you overdrafted your account. Not only is it entirely your fault, it is usually better for you to pay the overdraft fee than to have the check bounce. I think there should be limits to how many overdraft fees you should be charged in a particular day (you write three checks, you should only be hit with one overdraft fee and two bounced checks… not three fees), you probably want your mortgage or rent check to go through even if you’re short a few dollars. (plus, you can always ask to have the fee waived if you don’t do it often)

Overdraft fees hurt. At an average of thirty bucks a pop, that’s more than an hour or two of work (if not three or five after taxes) for many people. You shouldn’t be someone who “overdraws your account with any regularity” and at $30 a pop, that alone should be enough to change your behavior. If it isn’t and you still overdraw with any regularity, then it’s probably not that important to you anyway.

When people lambaste banks for earning money this way, remember that this is a case where it’s the customer’s fault. Banks might play some games to maximize their revenue, but it still starts with someone writing a bad check.

When I get that letter, chances are I’ll be opting in.

What do you think about overdraft protection? Scam? Safety net?

{ 74 comments, please add your thoughts now! }

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74 Responses to “Overdraft Protection Is A Good Thing”

  1. JimmyDaGeek says:

    In principal, you’re right. People have become lazier about keeping track of their account balance, especially with the rise of debit card usage. This laziness about balancing a checking account or checking a balance by phone or web doesn’t give people an excuse to overdraft their account. Financial institutions “bank” on this human trait. You’d figure that people might learn. Remember that old line “Fool me once, shame on you; Fool me twice, shame on me.”

    BUT there is at least one situation where overdrafting is not completely a person’s fault. Sometimes, when you use a debit card, the merchant puts some kind of hold on your card for an amount of money that is greater than than what you spent. I keep reading that this happens at gas stations and hotels where the final balance is unknown. Until this hold is released, you don’t have access to your money and it’s easy to overdraft your account if you run close to the line.

  2. I have only had 2 instances where I have been charged overdraft fees, with one being my fault. The one time I was at fault unknowingly and they charged me three times when I had no clue. There really should be a limit of one fee per day since it really can add up. Luckily the time it wasn’t my fault they took the charge off. The other time they reduced the charges to only one fee with a simple phone call.

  3. @ Lakita: Your bank CHARGES you to move money from your Account A to cover an overdraft in your Account B? Maybe it’s time to move to a credit union. At my CU, that service is free.

    A lot of people seem to think overdraft protection is just another form of debt, which of course it is, if you allow overdrafts to happen very often. However, as paystolivegreen points out, mistakes are made…often not on the part of the bank customer. Your account can be overdrawn through no fault of yours — the last thing you need is for a merchant or creditor you thought was getting paid properly to decide you’re a deadbeat.

    When PeopleSoft created a huge fiasco after my employer outsourced payroll to that outfit, many workers didn’t get paid at all; others received paychecks that were a fraction of their real salary. I arranged for overdraft protection in the amount of one month’s pay, figuring that at least this would keep my various automatic bill-pays from bouncing. You don’t have to be a deadbeat or a lazy bookkeeper to experience an overdraft.

    • Jim says:

      I agree that if your bank charges you a large overdraft fee (I think a nominal fee would be fair, like a couple dollars) just to shift your own money from account to account, you should go elsewhere.

  4. jsbrendog says:

    overdraft protection is a good thing for those who can’t be responsible enough to keep watch on it themselves. some people just need others to do things for them and this will help them…..unless theyre too stubborn to actually opt in

  5. Erica says:

    I agree that overdraft protection is my responsibility, but I was just give (at the end of the year) a large financial gift. The bank said they needed to sit on it for a prescribed period of time and gave me a specific date. On the date I assumed the check would have cleared, my account bounced three checks written much earlier. When I called, I was told that the check would be available to post on the day after I’d been told it would be available. Who knew. That felt like a way for the bank to make money and I felt ripped off. They were sitting on twelve grand, but I ended up being charged $105 in overdraft fees. When I complained, they refunded $52, but that was it. I feel had and although this has been my one bank for everything for many years, I’m considering switching over to a credit union.

  6. Cory Kaufman says:

    I don’t see anything wrong with a debit card declining if there is insufficient funds. I can understand someone preferring an overdraft fee vs. a bounced check if they are making an important payment (mortage, whatever) but I think in most cases a small line of credit (like ING Direct checking has) is the fairest thing for banks and consumers. Personally, I would like more options for what to do if I have insufficient funds. Aside from the line of credit (which none of the other accounts I own have), I would like to draw from a separate account, or charge a credit card (especially if I have a card at the same bank, I don’t see any reason why it couldn’t be used as overdraft protection).

  7. govenar says:

    In general I like overdraft fees, since it allows the bank to transfer money from people who don’t care about it to people who do (e.g., in the form of credit card rewards).

  8. hoht says:

    They say opt in, I’m ready to opt out. If I know where my money goes and whats left in the bank, then I won’t need overdraft protection.

  9. Tom S says:

    Honestly, I think some of you people are just bored or real type A personalities. I have a real busy life, I can tell you my balance to the nearest $50 probably, but not the nearest $1.

    I shouldn’t have to worry about my own bank mugging me.

    • Jim says:

      Resorting to insults is a bit childish don’t you think? You don’t need to know it to the $1 unless you only have $1 left in your account.

      • Tom S says:

        I wouldn’t call that an insult, but an observation. Some people do in fact pay more attention to their balance than others, for whatever reason. But does that give them some sort of right to tell others they should do the same or they are a bad person?

        Some people really are too busy. The poor especially. Just a week ago, someone I know who is struggling, who trusted the ATM balance, basically just lost their next paycheck due to overdraft fees. (They have 2 jobs, at Fed Ex and with the Census.) That’s huge, and it’s not funny. There are very real reasons why the poor do not trust banks.

        Where is the social outrage? Simply put, most people who can do anything about it don’t care. Most reader of this blog just seem so smug that they are oh so clever and it’s not happening to them. The current system is disgusting and anyone who says otherwise is simply naive to the breadth and depth of the unfairness.

        As for myself, all I can say is that I’ve never overdrafted as much as when I was in grad school. You figure that one out.

        • JimmyDaGeek says:

          “Some people really are too busy.”

          Don’t you expect people who drive a car to pay attention to traffic, or do you let them go where they want to go, at any speed, without signalling, with out learning how to operate a car? I suppose it’s OK if they’re too busy shaving or putting on makeup or texting.

    • govenar says:

      You don’t need to know your exact checking account balance at all times, like when you’re out shopping. The only time I need to know my balance is when I’m at my computer paying a bill online or writing a check for rent; if I’m at my computer, it’s very easy to check my exact balance.

      Maybe the problem is that you’re using a debit card. Just use a credit card.

      • NateUVM says:

        Or, if you’re trying to avoid the trap of running too much up on a credit card, how about a charge card that HAS to be paid off each month?

  10. Erica says:

    I use a credit card for my daily expenses, based on a budget I’ve worked out of how much money I should spend from paycheck to paycheck. I keep track of how much I’ve spent by making a note on my cell phone, since it’s pretty much always with me. Budget amount. Amount spent. Amount left to spend.

    I have an Excel spreadsheet with my account balances. It gets updated mostly on paydays, which is also when I pay most of my bills. Again: Account Balance. Money allocated towards expenses. Amount left over. It doesn’t matter how long something takes to officially hit my account, because my Excel balance is always accurate.

    I really feel it all comes down to personal responsibility. Does that mean the fees the bank charges are “fair”? Perhaps, not. The interest rates on credit card balances aren’t “fair” either. There are on ton of things in life that are set up to take advantage of people who either don’t care enough or aren’t educated enough to protect themselves. Our legal system attempts to rein in the most egregious examples, but for the most part, the childhood axiom that “Life isn’t fair” holds true.

    In saying that, probably the most important thing is educating people on how to manage their finances. I spent several weeks in a high school health class planning and budgeting for an imaginary wedding. Could that time have been better spent discussing daily budgeting and learning basic financial skills that could I could apply for the rest of my life? Probably.

  11. ij says:

    ..bottom line is a person should not spend more than he has and be responsible.

  12. primerspawn says:

    why pay overdrafts at all? banks have a little known clause known as OPTION IN, or option out as you would have it, making you nearly impervious to check bouncing. sign a piece of paper and your done with overdrafts all-together. and far as being ‘at fault’ with over-the-limit fees in credit cards and such, we should be careful not to adhere ourselves too closely in language they’ve created outlining a completely irresponsible, unethical and predatory process that they’ve created for maximizing profits

    • Tom S says:

      I don’t know about your bank, but I know at Old National, even if you opt out, you still will get overdraft fees. The only bank I’ve ever seen it done right at is the Bank of America CashPay cards and ING Direct.

  13. DaveS says:

    um. the issue isn’t about overdraft coverage for a check; it’s about authorizing overdraft fees to cover a debit charge. So, lets say you fill up at the gas station and you choose to pay with your Chase debit card. The $45.00 debit would not transact if you didn’t have the funds to cover it. This would give you the option to switch cards or pay cash. What the banks want to do is authorize this charge of $45.00, and charge you an overdraft coverage fee of $29.00 and voila, you got your gas without getting a declination of approval.

    Who the heck writes checks today anyway? Why is that such a big deal??! I’d rather a debit get declined rather than processed. I get emails anyway.

    That reminds me.. I forgot to pay a bill. My fault. Damn.

    • Shirley says:

      “Who the heck writes checks today anyway? Why is that such a big deal??!”

      Although I write very few checks, I will write one to (for instance) the local handyman who comes by to fix a plumbing problem. He doesn’t have the capability to accept CC or debit card and the check is my proof of payment and dated receipt.

      Many instances like this need to be paid by check rather than cash.

  14. Jake says:

    The problem was the sneaky way the banks charged overdraft fees and that fact that no banks allowed you to opt out before the law went into effect.

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