Don’t get in over your head in overdraft fees.

It’s happened to the best of us. You go online to check out your account activity and notice that charging yesterday morning’s $4 double mocha latte on your debit card pushed you $1 beyond your balance. Uh oh. But wait, it looks like your bank fronted you the extra buck so you could start your morning off right with your much-needed cup of joe. Sounds like they’ve got your back, right? Not so much. For that favor, you were just slammed with a $35 overdraft fee.

Back in 2010, the Federal Reserve issued a rule that banks need express permission from their customers to provide overdraft protection (which basically covers charges that exceed the account balance – for a fee). Previously, banks could automatically enroll their customers in the service without their knowledge, but now customers now had to actively “opt-in” to the program. So in theory, it sounds like the consumer gained some increased protection against being bilked by their bank. But in reality, not much has changed – except the letter of the law. Well, that and the cost of overdraft fees.

In the recent span of just 5 months, overdraft fees shot up $2.50 to an average of $35 – a rate of increase that a respected economist says is unprecedented in the 30 years since this type of data’s been collected. In fact, in 2011 banks raked in almost $30 billion in overdraft penalties. Why the crazy uptick? When asked, banks admitted that it’s to compensate for the loss of profits that overdraft regulation has cost them. Yep, the very same regulation that was created to protect the consumer from overdraft fees in the first place has “forced” the banks to charge higher overdraft fees to compensate. Talk about a vicious cycle.

So if people now have the chance to opt out of pricy overdraft protection, why do a full third of all Americans choose to stay in the program?

A survey by the Center for Responsible Lending shows that customers have been cajoled into opting in because of misleading marketing. 60% of consumers who opted in said that a big reason they did so was so that they wouldn’t get charged a fee if their debit card was declined. Guess what? A declined debit card never costs a fee. And 64% consumers said they opted in to avoid bouncing paper checks. The truth? Opt-in rules only cover debit card and ATM transactions – non-sufficient funds are still going to make those paper checks bounce. Through full-court press campaigns, banks have basically convinced their customers that by opting-in to overdraft protection, they’re making a fiscally responsible choice. In reality, it’s costing them boatloads of bucks.

But there are viable alternatives that can help you say goodbye to overdraft protection (while minimizing your exposure to embarrassing NSF card declines at the grocery store). Here are a few:

  • Get a checking account that provides an overdraft line of credit at a low interest rate instead of an exorbitant fee. For a 10-day $5 overdraft balance you would pay $30+ in traditional overdraft fees, but only pennies with this type of line of credit.
  • Don’t rely strictly on your “available balance.” Transactions that come in after the close of the business day often aren’t recognized until the next day – which could result in the appearance that you have more available than you really do.
  • Trick yourself and pad your checking account. When budgeting, add in a fake expense of $50 or $100. That money won’t actually come out, but the surplus will be there in case you go over.

So take the time to think about whether opting in is worth it, and if it’s not, go and opt out. A little bit of budgeting and keeping track of what’s in your checking account may take some effort, but that sure beats paying your bank a silly amount of cash in ridiculous fees any day.

What are your thoughts on this Saver? Do you like having the just-in-case security of overdraft protection (even if it costs you major bucks) or do you think no amount of protection is worth paying an exorbitant fee.

Federal Reserve
Center for Responsible Lending

  • Yardell

    I have the overdraft line of credit on my orange account, but I work hard to not spend into it. I have an app on my Android phone called “Loot” that I use to log every debit purchase as I make it through the day. That way, I stay one step ahead of my allegedly “available” balance.