Challenge: What Type of Overdraft Service Do You Have?
Posted by Gail, the money mom at 06/23/08 06:00 PM

Do you know what will happen if you accidentally overdraft your bank account? Overdraft occurs when there’s not enough money in your checking account to cover a check, withdrawal, or automatic payment. In the past, you’d either have your transaction declined for lack of funds or your check would bounce. But more and more, banks are automatically enrolling customers (without given them any notice) in what banks call “overdraft protection” plans that cover these transactions for the price of an overdraft fee. That may sound nice, but these automatic overdraft plans are very expensive and work like small loans at extremely high interest rates.

Take this example from a report by the Center for Responsible Lending (CRL):

You go into the supermarket and used your debit card for a purchase that was $80 more than what you had in your bank account, all because a check you deposited that day had not yet cleared. Though you didn’t know it, you were automatically enrolled in an overdraft program when you opened your account. So instead of declining the transaction, your bank loans you $80 to cover the overdraft, and the transaction goes through for a fee of $26.90. (The average overdraft fee is actually $34.) If you pay that “loan” back one week later, you’ve paid 1,753 percent APR on a short term loan which you never signed up for.

The kicker is that your bank probably offers a number of services that would have covered the transaction for much less money. You may have the option to link your checking account to a line of credit or a credit card which usually carries an APR between 18-30 percent. If you have a savings account with the bank, you can link it to you checking. Instead of the bank giving you a loan when you overdraft, it takes the money out of your savings and charges you a one time fee of approximately $10.

ASK YOUR BANK

1. Did your bank automatically enroll you in an overdraft plan that will “loan” you money to cover all of your transactions if you exceed the amount in your checking account?
o If so, find out what is your bank’s fee per transaction.
o Ask whether your bank charges an additional fee for every day that your account is overdrawn.
o Will the bank remove the overdraft loan feature from your account or link your checking to your savings account or line of credit, which would be less expensive.

2. Do you already have a savings account or line of credit that is linked to your checking account?
o Find out about the fees associated with these services and determine the most cost effective option for you.

3. Maybe you do not have any overdraft service. This means, if you don’t have money to cover a transaction, your checks will bounce and debit card purchases will be declined. In deciding whether this is your preferred option, consider the following facts: paper check’s trigger only 26 percent of all overdraft fees, while debit and ATM transactions trigger 46 percent and fee-based overdraft loans are very small, averaging $27, whereas the fees charged by the bank average $34. See CRL’s reports: Debit Card Danger and Out of Balance.

As money mom has mentioned in previous weeks, the Federal Reserve Board has issue proposed regulations to protect consumers from unfair credit card and overdraft practices. The credit card protections are an improvement, but the overdraft protections do not go far enough. Tell the Fed if you’ve had problems with your bank’s overdraft program.