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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. freeby50 says:

    I think overdraft protection can be a beneficial feature but it can also be manipulated and abused by banks.

    I haven’t ever paid an overdraft fee that I can recall. Certainly none in the past 10 years. The way I look at it an overdraft fee is $10 and a bounced check is $33 yet with the overdraft my check is paid. I would opt into overdraft protection. Not long ago my wife and I both simultaneously moved a large sum of cash out of our checking account. I paid a bill and she transfered money to savings. If we hadn’t caught that the same day then it would have been very easy for another bill to come due and for our balance to be empty and in that case overdraft protection would have been nice.

    Of course if you’re using a debit card a lot, living paycheck to paycheck and you aren’t watching your balance then overdraft fees can add up. And if the bank processes things a certain way then they can manipulate it to maximize the fees. But when it comes down to it people paying overdraft fees are usually doing so cause they spent more money than they had to spend and generally that is their fault not something out of their control.

  2. As long as you know what you’re getting into, they can be a safety net. Stuff happens. And sometimes you need a safety net when it does. We pay $10 yearly for our overdraft protection. There are no fees when it kicks in other than a 18% interest rate on outstanding balance. Much better than $25 an item or, worse, returned (or denied) debits.

  3. Jon says:

    I once had a roommate who lived paycheck to paycheck like this every month for years, but he also always had to have the latest Macbook, iPod, etc, etc. At one point he bought a PSP, and then his rent check bounced later that week.

    Just don’t buy junk you don’t need, this would solve a lot for most of you.

  4. Tom S says:

    I strongly disagree with you. If you are a heavy user of debit cards with a relatively low balance from living paycheck to paycheck, it’s very hard to keep track of your actual balance. Even if you log into the bank website or check the balance on the ATM several times daily, it’s still uncertain what your actual balance is.

    I’ve personally seen some transactions that don’t post for days after I have made them; and even once they post, it takes several more days at best to clear.

    If you go over a $1, you owe $30? If you have 20 transactions that haven’t cleared yet and you go a little negative, then everything clears immediately and you owe $600? This isn’t hypothetical, these things actually happened to me and I am sure worse things have happened to others.

    There is no possible moral or technical explanation for these exorbitant fees. For a while, I had a Bank of America CashPay card. It simply stopped working when there was no more money. Simple. Fair.

    The only fees I could see the bank charging is maybe a small transaction fee ($5?) and a relatively high interest rate.

    “Entirely your fault”? Please, if you can’t trust the ATM or your banks website, it’s basically like the system is lying to you and at the same time trying to make you feel bad for not noticing.

    • Jim says:

      If you keep track of your spending, then you know exactly what your balance is. If you started with $100 and you charged $10, you have $90. The charge may not be reflected in your balance when you check online but you personally must know.

      We can argue over the exorbitance of the fees (a $30 fee is high, regardless of how much you go over) but to claim a customer isn’t responsible because charges don’t post fast enough is itself not fair. You can’t shift accountability over your own finances.

      The ATM isn’t lying, it’s just not as fast as you want it to be.

      • Steven says:

        I agree that it’s 100% personal responsibility to keep track of how much you have and how much you spent. It doesn’t matter what your posted/available balance is, because you should be keeping track of how much you spent and many retailers/restaurants do a bulk submission at the end of the day or even wait a few days before submitting charges.

        Granted, banks do play the shuffle game with deposits and withdrawals to maximize fees, but this situation doesn’t apply to Tom, as he doesn’t even know how much money he has or has spent.

        Example
        $500 in account. ($500)
        Write a $200 check. ($500 – $200 = $300)
        Deposit $700. ($300 + $700 = $1000)
        Write $700 mortgage check. ($1000 – $700 = $300)

        What actually happens is:
        $700 debited first, triggers overage fee. ($500 – $700 = -$200 – fees)
        $200 debited second, triggers another fee. (-$200 – $200 = -$400 – 2 x fees)
        $700 finally credited. (-$400 + $700 = $300 – 2 x fees)

    • freeby50 says:

      Tom,

      It is the responsibility of the account holder to balance their own checking account.

      However I do agree some banks have been a bit slimy in how they handle overdrafts to maximize the fees. But when it comes down to it any negative balance is a negative balance that should trigger a fee under the rules of the system. Its not unethical to charge you a fee under the rules of your account that you agreed to.

      If you are living paycheck to paycheck with a low balance and can’t keep track of your balance then you should use CASH instead of a debit card.

    • JimmyDaGeek says:

      You based your argument on using debit cards. If that causes a person to overdraft, then shouldn’t they be learning from life and not do it again? Shouldn’t they switch to checks? Laziness is not an excuse for irresponsibility.

      • NateUVM says:

        Actually, and this actually underlines your point, Jimmy, they shouldn’t use checks, either. What posts slower than checks? Unless the payee cashes it immediately, it could be days, weeks before you see it reflected in your account.

        No, the person for which this is a problem should either use cash, or, ironically, a credit card. That’s the only way around getting hit with overdraft/bounced check fees if they don’t want to track expenses. Just need to watch out for finance charges if you use option #2…

        Bottom line….track your spending!

  5. Cindy says:

    I guess I’d better knock on wood before saying this, but if you’re the kind of person who needs overdraft protection, it might be better to fear the overdraft charges. Chances are, it will keep you from overspending too often. I know a few people who use overdraft as a payday loan, rather than a hedge against mistakes.

    People really ought to be able to figure out how to keep enough money in the bank to cover their charges.

  6. Cindy says:

    Come to think of it, my bank offers free overdraft protection, so if you want it, you really ought to shop around for a bank that won’t charge you for it.

  7. Chuck says:

    My credit union has a “checking line of credit,” so if I overdraw, I just have a small 13% loan for the overdrawn amount. So if I go over by $500 for a week or so, it’s about $1.25 in interest.

    Of course a credit union is unlike a bank in that it’s there to serve me, not extract money from me.

    • Jim says:

      Sounds like free overdraft or a more reasonable fee structure ($5 for the service, 13% interest on the loan) might be a more equitable way of running a system.

  8. Lakita says:

    When I think of Overdraft protection I think of the account that is protected by another account. Bank of America charges $10 transfer fee for overdraft protection but it is free if I transfer the money myself from savings to checking. I have an issue with that.

    The Overdraft fee you pay for insufficient funds…my only issue is the fact that most banks process the largest transactions first instead of the order they come in. The customer gets hit with more fees that way…unfair.

  9. billsnider says:

    I once wrote a check and forgot to move money over to checking to cover it. The company TWICE tried to cash it before I found out what was happening. They hit me with a $35 fee for each bounce and the bank another $25 per. OUCH!

    I instead set up a $3,000 credit overdraft protection. I did have to commit these funds to do this. I still earn interest but it protects me against another such hit.

    Bill

    • Shirley says:

      I believe that it is standard practice for banks to try an insufficient funds check twice, but this is the first I’ve heard of charging for both tries.

  10. I’ve had it for many years.

    It costs essentially nothing – except for interest charges on the cash borrowed. It’s a great safety net.

    Plus, it’s a cheap loan if strapped. Better than a credit card.

  11. Jackie says:

    I don’t think overdraft protection is a scam OR a safety net. Simply put, I think it’s a way for banks to make more money. What I have an issue with is the way it’s often marketed — as a way to help customers out, rather than as a fee for customers screwing up.

    I won’t be opting in, because I prefer just to keep my accounts balanced — and not opting in is added incentive to do so. But I can see how sometimes overdrafts happen and it’s not the customers fault — such as when a person deposits a paycheck that later turns out to be bad.

  12. echidnina says:

    I have the overdraft protection on my ING Electric Orange account – up to $150 or so. I’ve only ever used it once (charged groceries to the wrong card – whoops), and it was nice to have that safety net there. Plus they don’t charge me anything for it. I’m not sure if I’d pay for overdraft protection, unless it was a pittance like the $10/year Beating Broke has.

  13. Tom S says:

    Keeping a balanced bank account isn’t some sort of civic duty. The bank is providing a service in exchange for holding your money. If we were to speak of fair contracts, there is no way an overdraft causes a bank $35 in damages.

    No, it’s a systemic price fixing of fees. Most knowledgeable / well off people don’t complain, because they are not the ones affected. Also, most arguments that are used against payday lending can also be applied here.

    Also, this might be a generational thing, but I don’t know a single person who keeps a running ledger of their debit card use. Most rely on the ATM, website, phone, phone app, etc.

    There is an implicit assumption that when you ask your bank for the balance, that it should be correct at that time. Businesses should be required by law to post transactions immediately. Batching transactions may save money, but it introduces incredible amounts of randomness and lag in the system. It’s possible and not cost prohibitive, I mentioned earlier some cards have this feature already.

    Furthermore, most banks send notifications of overdrafts after the fact. Which is kind of a joke. If they really wanted to be helpful, they would notify you went something posted that will cause an overdraft, so you would at least have a couple hours to try and fix it before the transactions clear.

    • NateUVM says:

      Sounds like you want these transactions to fully process instantaneously, as if the technology were there yet? Not sure if you noticed, or not, but not even credit cards do this…

      No, rather, if you can’t keep track of what you are spending, it sounds like you should be using cash instead of even a debit card.

      I want to know what my balance is at all times. So I keep track of all my transactions. Yes, that means I keep a running ledger of all my transactions. That’s what that little booklet the bank gives you (for free, by the way) is for.

      Maybe it’s a generational thing, but I’ve been doing this since I’ve had a bank account (early teens), so maybe not.

      Look, you clearly acknowledge how the system works. You may not like how it’s set up, but you ARE aware of how it works. Even with that knowledge, you still want to push the responsibility for incurring these fees back on the bank? The bank has told you that a certain action has a cost, you take that action and then are upset when you are charged?

      Personal responsibility has to enter the picture somewhere.

      • Tom S says:

        Trust me, the technology is there. Furthermore, I am aware of how the system works, what I am saying is that the system is unfair. Would you still have the same argument if it was $100 or a $1000 fee? Where does $35 come from? It’s not from any sort of economic damage to the bank. I’m all for paying a penalty, but it should be a fair penalty.

    • Jim says:

      It’s not a civic duty but it’s a personal responsibility. I understand your argument that you want transactions to post immediately but that’s not how it works, so consumers have to adjust to how things work. If we forced instantaneous transactions and it were somehow cost prohibitive, then vendors wouldn’t accept those cards as payment. Or, if they did, prices would be higher all around. Either way, it’s a loss for the consumer.

      It’s also not a systematic price fixing of fees because lots of people have commented that they pay a small fee for overdraft protection and then a high interest rate while they’re negative. So plans do exist, the vast majority of customers seem to prefer the $35 per overdraft variety.

    • freeby50 says:

      “Furthermore, most banks send notifications of overdrafts after the fact. Which is kind of a joke.”

      Of course they notify you after the fact. They can’t notify you before the fact or instantaneously.

      • Tom S says:

        No, they could notify you before the transactions clear. I don’t think you understand. You can go negative, but still deposit money into the account or transfer money from another account before the end of the day.

        • Jim says:

          How is the bank supposed to know whether or not you’ll deposit? Until you do, they’ve extended you a short term loan. Banks can’t do that as a matter of practice without charging a fee to cover the risk. Is $35 high? Without knowing the actual cost it’s hard to say, it just seems high to me as an individual.

          • Tom S says:

            These alerts are supposed to be a courtesy. The bank won’t know if you’ll deposit or not, but that doesn’t matter. They could still alert you to the danger in time so that you can deposit. A message a day later saying “Gotcha”, only helps the bank.

            $35 per item has no basis in real life costs to the bank. It has no relevance to transaction costs or assuming risks. I understand that there is a cost, but the current method for calculating it is insane.

  14. Tom S says:

    I just can’t get over how out dated some parts of the financial system are. We have high frequency trading making transactions in milliseconds, but we still have checking account transactions that take days to clear.

    It’s ridiculous.

    I really don’t think there is any technical reason overdrafts should exist anymore. They shouldn’t even be a coherent concept.

    • Chris says:

      Agreed,
      I can write a check out to someone who deposits it at their bank. The bank turns it into an electronic file, presents to the fed, and it clears within a day or two, but some card transactions still take days to come in.

      • Chris says:

        It probably has to do with how many people are getting paid for that single transaction. Merchant Card service fees can be outrageous.

    • Bryan says:

      There are a couple reasons – sure the merchant thing is valid, but, specific to checking accounts there are a couple hurdles. First, regardless how fast items clear, if someone sends a check out with no funds, it’s gonna be an overdraft or bounced check fee (depends if they pay it).

      As far as deposited checks becoming available, it’s not just the validity of the funds that matters, but whether it’s a legitimate check. There is so much fraud these days, that if a system were in place that Bank A could pull immediate funds from Bank B when you deposit a check from Bank B, if that check turned out to be counterfeit but the account it was drawn on actually did have funds, then Bank B would be at MORE risk losing money than under the current system. Verifying that funds are there does NOT verify that the check was actually written and authorized by the owner of said account.

  15. I simply adjust my checking account to always have $2k extra in it. I look at the lowest balance just before my paycheck goes in. If it above $2k, I take the excess cash out and put it into savings, if it is below (happens once in a while), I just plow enough money in to fill the hole. Its VERY rare that I buy something for more than $2k using check or debit card, but in that case I would move extra money from savings before doing the transaction.

    Knock on wood, but using that method, I have NEVER had an overdraft in the past 25+ years of having checking accounts.

  16. Dustin says:

    If it isn’t and you still overdraw with any regularity, then it’s probably not that important to you anyway.

    This sounds reasonable, but isn’t bore out by the real world and disregards the complexity of the human psyche.

    I know plenty of people who don’t have the self-discipline to keep their checkbook balanced and overdraft 3-6 times a year.

    It causes them much heartache. It is indeed “important” to them.

  17. Justin Runia says:

    My only criticism of the overdraft policy at most banks is that the banks decide the order in which your charges are applied–if you overdraft $10 over the course of numerous daily transactions (for example $10 on breakfast, $7 on lunch, $8 on dinner, and a late-night impulse-buy from bestBuy.com for $500 on an account that only has $490), the bank will arrange the transctions to maximise their overdraft fees, likely listing the Best Buy purchase first, and collecting overdraft fees on the other transactions that were actually legitimate. This scheme was recently documented in the encore presentation of the frontline episode The Card Game, I reccomend you check it out, especially the part where a lobbyist tries (unsuccessfully, IMHO) to justify this practice.

  18. Justin Runia says:

    (my numbers got a little skewed in the above example, the total overdraft would have been $35, not $10)

  19. eric says:

    I remember when I applied for ING Orange checking they made you sign up for some overdraft protection.

    • NateUVM says:

      Was it required? When I signed up, it was merely an option I could decline.

      • Jim says:

        Some banks make it a requirement, others optional. Once the new rules take effect, it must be optional.

        • govenar says:

          I wonder if this will make ING stop doing hard credit inquiries for the Electric Orange account. That’s the only reason I don’t like like overdraft.

          • NateUVM says:

            Probably not. Especially if it’s optional. And as a great example, and more specifically to this matter, ING’s Electric Orange’s overdraft protection is already optional.

            Think about it… They’re extending a line of credit to you. It’s going to be a hard pull. But again, it’s optional. You don’t have to enroll when you sign up for their checking account.

            Whether they do a hard pull for JUST the checking account without the overdraft protection(line of credit), I don’t know. Was that what you were referring to?

          • govenar says:

            ING Electric Orange actually requires the overdraft line of credit, it’s not optional (at least, as of a couple months ago). So they always do a hard credit inquiry.

            I agree with the part about doing a hard inquiry for overdraft… though even then, they could wait until you actually make use of the overdraft. I think banks like to do hard inquiries because they also offer mortgages; if they can artificially lower your credit score, they can charge you higher interest on a mortgage.

  20. I too disagree. Just like credit cards, overdraft protection encourages people to not be responsible and learn how to not bounce checks or spend money they don’t have. My take anyway.

    • Shirley says:

      I feel like overdraft protection was meant to be simply an insurance backup, much like life insurance, for when the truly unexpected (and definitely unintended) happens.

      Although I have both, thankfully I’ve never needed to use either. :-)

  21. Safeway_Sage says:

    I prefer to just have emergency savings. 20 dollars a check adds up quickly and if yo know you screwed up. Well it doesn’t hurt as much if you can use savings to fix the situation.

  22. tbork84 says:

    Is it really asking too much for people to balance a check book? I have no problem with banks penalizing those too lazy to keep track of their own money, but multiple charges in a single day is pretty obscene. There should be a limit on that.

    • aceofwealth says:

      @tbork84

      I believe that this is a much better way for banks to make money than to penalize responsible people caught up in exorbitant fees. But it is true that sometimes people make mistakes, and the penalty fees could be a rude awakening.

  23. zapeta says:

    I don’t have overdraft protection. I have a rewards checking account that pays a great interest rate so I keep nearly all of our emergency funds in that account and that can easily cover slight overspending. If I didn’t have that I would opt in to overdraft protection.

  24. stan says:

    I have overdraft protection $5000 with my Credit Union. I pay it off every month so I have no expense. I transfer all my excess income into the highest interest Money market for the month and then use it to pay off my overdraft before it charges interest every month.

  25. Chris L says:

    Long story short, over draft protection saved me a few times when my son was born with medical issues and only one parent was able to work. In my opinion it should only be used in a time of need, not as a continous stream of funds you do not have.


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