Costly Overdraft Protection

Aug 12, 2014 by

Bank FeesDo you have overdraft protection for your checking account? If the product is free (if unused I mean), I always sign up for this “insurance.” I don’t trust myself to never make a mistake in monitoring my checking account balance, and I sure don’t want to go through the hassle and expense of bouncing a check.

Is Overdraft Protection Saving You Money?

The Consumer Financial Protection Bureau published a study last month on checking account overdraft protection fees. CreditCards.com summarized some key results in this nifty graphic:

CreditCards.com infographic: Customers with overdraft protection pay more in fees
 

Focus your gaze on the middle bar in each fee category, which represents those who have overdraft protection. Bank customers with overdraft protection pay higher fees on average than those with no overdraft protection in all five fee categories. Wow!

Look at the “fees for overdraft and non-sufficient funds” fee category. Those with overdraft protection pay an average of $29.09 per month, while the potential check-bouncers are paying only $2.98!

Why Are Overdraft Protection Customers Paying More Fees?

If you have overdraft protection on your checking account, you can’t get hit with returned check fees. But if you do overdraw your account, your bank’s going to cover the deficit, and it’s not going to do so for free, of course! You’ll get hit with fees for using overdraft protection. If you look at these fees like interest on the money the bank is “lending” you to cover the short-term (three days on average) deficit in your checking account, the CFPB says the math works out to a 17,000% APR on average! Holy crap, that makes payday lenders look like charitable organizations!

How to Use Overdraft Protection

What do the CFPB’s figures tell us?

Evidently a lot of people use overdraft protection routinely to spend more cash than is in their checking account. According to the CFPB, most transactions that activate overdraft protection are $24 or less. Factor in the bank’s fees, and the cost of whatever the consumer just had to have right now when overdrawing his or her account skyrocketed out of sight.

Just like credit cards, consolidation loans, home equity lines of credit, and many more handy financial tools, overdraft protection can help or hurt us, depending on the choices we make. If having overdraft protection on your checking account makes you feel as if you’ve got a license to overspend, the service is hurting you. But if your aim is never to use the protection and you see it as insurance against a rare mistake in tracking your account balance, the service can help you.

Reminiscing

Back in my impoverished university days before banks had gotten clever enough to invent overdraft protection, my finances were so tight I regularly played the “float” in managing my checking account. I’d write a check today that my balance wouldn’t cover, but I knew I was getting a paycheck in two days, and I believed the check I’d written wouldn’t hit my account for three days. I was wrong often enough that I bounced two or three checks. My solution? I couldn’t do much more about my poverty, so I closed my checking account and relied on cash, money orders, and cashier checks instead.

How About You?

Do you have overdraft protection? How do you think about the service, and have you been dinged by fees?

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  • Cashville Skyline

    I would absolutely enroll in overdraft protection if it were free! I monitor my checking account like a hawk, so I haven’t ever had a problem with those pesky fees.

    • You really have to monitor like a hawk these days–the banks have set ‘fee traps’ everywhere designed to snare those who are less diligent!

  • I don’t have overdraft protection because just like what the surveys says, that it makes people to spend more money because of the fee. Besides, if only we monitor our money carefully and make sure we don’t go overdraft, overdraft protection is really not necessary, at least IMHO.

  • squirrelers

    Good topic, one that’s probably not discussed enough. Personally, I have never been hit by fees and I try my best to keep a buffer. But not everyone can swing this, and even if that can they have different spending patterns. It’s a good feature to consider, or not forget about.

    • I aim to keep a buffer too. But I’ve gotten stung a few times not by overdrafts but because the checking account balance fell below the minimum balance our bank requires to avoid a monthly fee. That’s a $9 mistake at my bank, ouch!

  • My wife and I have overdraft protection that drafts from our money market account. This is great, because we pay no fees, it’s our money and it gives us peace of mind. Of course, if we overdraft too much, we get hit with the fee from making too many withdrawls from a money market account and I actually like that, because it keeps us on track. We also keep a $500 buffer in our checking account for unexpected or miscalculated purchases. That too, is for peace of mind. Great article, Kurt!

    • Two good strategies to avoid overdrawing an account and to minimize fees… thanks for sharing!

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