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Why You Should Avoid Overdraft Protection Services

By Mark Riddix


I’m going to assume that we’ve all been slapped with an overdraft fee at some point in our lives. We’re not perfect, and banks are extremely sneaky at finding ways to help us overdraft our bank accounts. Here’s some information about overdraft fees and why you shouldn’t use overdraft protection services.

Overdraft Fees

Overdraft protection was designed to be a customer friendly service that kept the customer from suffering the momentary embarrassment of a bounced check or declined debit card transaction. Banks would allow customers to spend money that they did not have for a small fee called an overdraft fee. An overdraft fee is a fee charged by a bank when a purchase or withdrawal exceeds the available balance on the account. Overdraft fees used to be relatively minor but today they have become big business for banks. Banks absolutely love overdraft fees. They derive a significant amount of their income from overdraft fees. The U.S. banking industry collected almost 40 billion dollars in overdraft fees in 2009. Overdraft fees are collected on checking accounts and credit cards.  Banks will approve a transaction that will put a customer over their account limit and then hit the customer with an extra charge. Every subsequent transaction is hit with an additional fee until the account balance is brought up-to-date. While overdraft fees are a bank’s best friend, they are often a customer’s worst nightmare.

Bank Horror Stories

Overdraft horror stories are becoming commonplace. People will often talk of being charged $35 for a $4 purchase at McDonald’s or a $35 fee for a $1.99 soft drink purchase. I have heard stories of people being charged overdraft fees as high as $39 for each transaction. I recently was speaking with a friend of mine and he told me about his own overdraft horror story with a financial institution. He had been a member of his bank for over 8 years. His total available balance was $ 760.00 on December 10th.  He had written two checks totaling $750.00 on December 10th. One check was for $500.00 for a loan payment and the second check was for $250.00 for a utility bill payment. He did a poor job of keeping track of his balance and proceeded to use his debit card to buy gas, gum, coffee, and beverages earlier in the week. The bank cleared the two checks first even though they were written well after the debit card transactions and charged overdraft fees for all of the smaller account transactions. He was charged $35 each for 11 debit card transactions. Each transaction was only for a few dollars. Some of them were as small as two dollars. He ended up having to pay $385 for roughly $45 worth of transactions. Had the bank just processed the payments in the order that they were received, his total fees would have amounted to $35.

This trick is used often by large banks. They will change the order of checks clearing or delay posting deposits so that they can increase the total amount of overdraft fees. This method is the “biggest check first” policy. Banks claim that they clear the biggest transaction first so that a customer’s mortgage or rent payment does not bounce. This is a total lie. They clear the biggest transaction first so that all of the smaller transactions will overdraw a customer’s account, and they can obtain overdraft fees. If they cleared the smaller transactions first, the bank would only be able to charge the customer a one time fee of $35 for the largest transaction. By clearing the largest transaction first, they can obtain a greater amount of fee income.

What can you do about overdraft fees? 

The good news is that you have the option of declining your bank’s courtesy overdraft loan program. All you have to do is call your bank and inform that you would like to opt out of their overdraft program.  By opting out you may suffer the embarrassment of a declined debit card purchase, but it is much better than paying the fees associated with avoiding momentary embarrassment. Doing this means that you’ll need to be much more disciplined with balancing your checking account, logging every debit card purchase, and making sure there are enough funds in your account at all times for important checks to clear. If a check doesn’t clear, you’ll be charged a fine for the bounced check.

Have you ever been charged any overdraft fees? Tell us your overdraft fee horror stories or your opinion on the subject.

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, Your Financial Playbook.

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  • http://lifetuner.org Keith Morris

    The biggest check first policy is a total ripoff. However, after a negative experience with my electric company, which I wrote about at the link below, I’m on the fence about overdraft fees in general. My online bank returned an insufficient funds error to my electric company, whose policy is to disallow online payments for a year on the first offense. I would rather deal with an overdraft fee than the inconvenience of having to drive to my electric company every month for a year to pay the bill!

    http://www.lifetuner.org/topics/26-budget/discussions/392-feeling_abused_by_my_electric_company

  • http://personalfinancejourney.com Lakita (PFJourney)

    Yes, I’ve been charged overdraft fees and it is the most annoying thing because usually its a very small charge that puts it over the top. As expensive and asinine and the fees are along with their policies…what REALLY drives me crazy is when I get charged an OVERDRAFT TRANSFER FEE (albeit usually less than the typical fee) to take MY MONEY out of savings. But if I transfer it, then it is FREE….WHAT?

    OK…end rant.

    Next week I’ll be discussing how to get overdraft fees refunded…I talked to a representative from a national financial institution and it is possible.

    • http://www.maketodaypayday.co.uk Kate

      Lakita,

      I keep such a close eye on my balance so I can go ahead and transfer the money over from my savings. Luckily I haven’t been hit with the transfer fee yet. Banks will get you anyway they can!

    • Mark Riddix

      I never understood why transfers are free but overdraft transfers occur a charge. I would be very interested to hear about banks refunding overdraft fees.

  • Meghan Fife

    That’s why credit unions are bomb. In my case with a credit union there is no overdraft transfer fee and the overdraft fee is 22.50.

    If I understood correctly I believe the law is changing before the end of 2010 where you will actually have to opt-IN to this overdraft protection.

  • Karmella

    Another reason I’d so much rather use my AmEx than ever use debit.

    I only ever pay “real” bills from my bank account and I wouldn’t ever want those payments returned, so I think I would want the protection. I didn’t even realize I had it, but if it’s opt out I must.

  • L W.

    We call Overdraft fee’s “Steak Dinners” for the bank: one year we had over 4000 in over draft fees (we were shock during tax time that year). Since then we only hand out about 2-3 “steak dinners” a year: and hope to prevent them totally. We are now using banks that will list deposits first then checks in their system and a few will notify you when a check is in their system and at risk of bouncing: we are doing more business with these bank every year.

    Also check your Bank Policy: some banks will place a cash deposit after 2:00pm the following day at midnight: while debit’s posts as they come in: Which will cause more “steak dinners”: (that’s how we had 4000 in overdraft fees that year). OTHER Banks will deposit them when you make the deposit: so long as during regular business hours.

    Also several banks have an credit line that can be tied to a checking account: it does charge you interst and if you transfer the money your self there no fee: if they transfer it then there is a charge but not has much as the 35 dollars overdraft fee. We are trying to keep a tight watch on our expenditures but sometimes you can’t prevent it.

  • http://www.howisavemoney.net Lulu

    I have never been charged an overdraft fee (crosses fingers and prays it never happens in the future) because when I started out I operated on mostly cash. I balanced my checkbook after EVERY transaction and kept a buffer of $100 in the account to take care of any incidentals.

    I currently pay bills and do shopping off my cash back credit cards and only use my checking account (from ING) to pay the credit cards. I make ING push a payment to the credit card instead of the card pulling from my account so that I control what leaves the bank account.

    I do feel sorry for some people who get hit with those charges like your friend…but some others really need to be more careful. We KNOW that the banks will always post the largest checks first so it is really up to us to balance our accounts and not write checks with our fingers crossed that they will post at a certain time.

  • Sarah Coulsey

    I have been banking with the same Credit Union for almost 10 years now. Their overdraft fees were $5 when I started there. Now they are $23. They are not nearly as bad as some big time banks (I.e. Bank of America) but they are getting there. I have the overdraft protection and I couldnt live with out it some weeks. We live paycheck to paycheck (especially sence we are payed by-weekly) and when unexpected bills hit (car breaks down) we need that extra money just incase. We work very hard not to use it. I once got sooooo mad that I tried to get rid of the overdraft after getting hit with 8 different fees. I was told that we are more then welcome to get rid of it, but if we get down to zero in our account, and charges try to go through, they wont be paid, and we will still be charged the fees. On weeks where I know I will need the extra money, I take the overdraft out of the ATM (the whole amount) and just pay everything I need with cash. That way I am only hit with one fee instead of many many!!!!

    • Mark Riddix

      Smart move Sally!

    • Tkblondie01

      I might just use that myself,We just changed to an account with $400 in overdraft protection,we used to have only $100 I am disabled and my husband is the only one working,last yr we payed over $2000 in overdraft fees,they would pull the largest transaction first or where it’s pending but as soon as you make a deposit they post it but instead of after the deposit they do it right before so they can charge more fees,now with the larger overdraft coverage the money is there if we absolutely need it and we are hit with less fees,our bank will charge a $23 fee if it comes in and your overdraft and then they would kick it out as NSF and charge another$23 for a total of $46 for one item,that was when we only had the$100 protection,now that we have the$400,the transaction is paid and the one time fee of $23 is assesed,our bank tried to talk us out of going with the higher overdraft and of course they would they were making loads of money sticking it to us.
      I definitely like the idea of pulling it all out the $400 and paying cash,then we would have the one time fee of $23,I really really like it,I’m tired of my bank and all their fees!

  • http://www.maketodaypayday.co.uk Kate

    When I was living in LA where money was completely tight, I got hit with overdraft charges that spelled disaster for me. Not only do you barely have enough to rub two nickels together, you suddenly owe the bank over $75 because they cleared the largest payment first. Or another favorite of mine, if you use your debit card and the store runs it as a credit card; they can put the transaction up and then take it down only to have it appear back in your online statement 3 days later. Ugh!

    Luckily I have finally gotten to a place financially where I have overdraft protection with a savings account linked to my checking. Also, I am constantly checking my balance online or on my phone to make sure that I am not going to go over my balance.

    Thanks for this article. I do believe I have heard the US government is going to put some restrictions on this practice by banks.

  • Erik Folgate

    Thanks for all of the comments. There is some great information and advice here. We have the best readers on the planet!

  • Kevin Eldridge

    I agree completely with what Kate said about using a Savings account and linking it to your Checking account. I did this when I changed banks from a Big, do not care about your customer National bank, to a smaller, more friendly and actually care about you bank.

    This all started when I started with the Dave Ramsey plan and have the $1000 Emergency Fund in my Savings account. Tied that to my Checking in case anything goes over. The charge for doing this is extremely small compared to $15, 25, or 35, per occurrence.

    Good luck to everyone in getting out of debt and building wealth!

    Kevin

  • http://www.yourfinances101.com/blog David/Yourfinances101

    Opting out would be the first line of defense.

    Or, keep a secret amount in your account.

    Put thrity bucks in there, don’t record it on your check register or anywhere else.

    That way, you’re always protected.

    • Mark Riddix

      Good idea. That would provide you with an automatic cushion.

    • http://www.earlypaydays.co.uk Frank P

      Love this idea – will definitely adopt it myself.

  • http://madsaver.com Mac

    Right now I have most of my banking services through one bank (Wells Fargo), such as checking, mortgage, line of credit. If I “overdraft” on my checking account, the money automatically comes out of my line of credit, of which I have a huge buffer. Sure, I have to pay some extra interest on that money, but it is very little compared to their high overdraft fee. It’s saved me more than once!

    • Mark Riddix

      Another good idea.

  • Mike

    My overdraft nightmare accorded last summer. On a Tuesday I was cramming for my finals and bought two cups of coffee for $2 a piece, then on Thursday of that week I bought $60 worth of groceries. The next day my account was -$141, because I ended up accidentally spending $1 more than what I had in my account. The reason that I was hit with so many overdrafts fees, was that the bank and their infinite wisdom placed my grocery bill first, and then my 2 cups of coffee even though I bought them in the opposite order. In the end I got one fee reversed after a bank employee excused me of playing the system.

    • Mike

      *excused- I meant accused

    • Mark Riddix

      That is a travesty Mike. At least you had your fees reversed.

  • Deathkings8456

    im 16 with my first job and i help my mom with a couple of the bills such as cell phone and internet. ok just 3 weeks ago i had 90 in my account i payed the internet bill i bought some small things i got my next pay check everthing was fine, i continued my stupid swiping routines (new cloths, shoe, candy, gas,ect)but then suddenly my card gets declined!? i was sure i had at least 50 in my account. i come home my account is 130 over!! im like WTF! apparently i when i paid my bill i had $2 in my account i made a stupid mistake i go over i understand that but i thing is i just dont understand why it showed three days earlier that i had money in my account and when i went to the bank they were like my account was already negative!!! well all in all they screwed me over i will pay them off but i got one major problem ive got direct deposit!! (btw i know i make no sense have of the time im just sooo pissed and dont know wat to do with my upcoming paycheck)

  • Daisy Smith

    My husband and I are currently -$135 thanks to little charges and insane overdraft fees. Thanks to $30 worth of small charges, we lost $105 to NSF charges. It’s so frustrating. They pulled the bigger check first stunt on us too. It hard to dig out of a hole when they are constantly putting you back in.

  • pattib59

    My bank does not post deposits made after 2:00pm until the next business day, but withdrawals made after 2:00pm are posted the same day. I don’t know how this can be legal in the banking industry.

  • sara

    I had sign up for overdraft and some body stolen my identity and had over 1,000 dollars in overdraft. I couldn’t keep up with the payment. Now I use a prepaid netspend card. You can have overdraft, but it only for up to 100 dollars and you get charge 10 dollars each time. It will stop when you reach 100 dollars.

  • http://www.facebook.com/MelloMommy Melody Stanley

    Keep in mind that even if you do opt out there are still circumstances where the bank can still charge a fee for transactions made with you card. Here’s my horror story about Guaranty Bank of Wisconsin: I had a payment through Paypal with my Visa check card that was wrongly coded as reoccurring even though I had not authorized it. They did not have my account number so it was a pin-less debit transaction using my Visa number. It overdrew my account by $6.00. As I was not expecting any transactions on my account I was not logging in to check my balance. By the time I got the letter from my bank it had been several business days. At that point in time after 3 business days the bank began charging $10 per day in addition to the initial $37 fee. When I got the letter my account was already -$93. They agreed to reverse the initial $37 fee but I still could not deposit enough to stop the $10/day charges from building up. I reached the maximum period of 10 business days for the daily fee. Paypal reversed the initial charge that caused the overdraft because it was made in error. I called Guaranty Bank back to see about having the daily fees reversed also because I had opted out of overdraft service for debit card transactions and now I had Paypal verifying that it was not supposed to be a preauthorized reoccurring charge. It should not have occurred at all and was wrongly coded so that instead of just being declined it caused a fee. Along with the refund of the erroneous transaction that PayPal deposited back in my account the fee reversal would have made my balance positive. They said that because the $37 was refunded they were not able to reverse the $100 in daily overdrawn account fees. A manager said that he tried, but their system would not allow him to do it. By this point I had opened an account at a new bank that I am happy with and switched my Social Security Disability to that bank for Direct Deposit, so I left the Guaranty checking account alone. A couple small direct deposits of SSI for my disabled daughter that were still going to that account would have brought the balance (about -$96) up above zero within the 43 business days that they allow before closing the account and charging another $50 fee. I left it set to go to that account for another month to pay off the fees before I closed the account. They would not let me close it with a negative balance and I did not have enough to spare that month to pay it off in full. I had maxed out the days they charged the daily fee for, shut down my check card, and was no longer using the account. There would be no new transactions so I did not expect any more fees. What I did not realize was that they just changed their overdraft policy towards the end of February so that they now charge $28 per day that an account is overdrawn (instead of a per-overdraft fee +$10/day for 10 day max after the 3rd day like they had), up to 14 business days and beginning on the first day that an account has a negative balance. They began charging me this on the first day the new policy went into effect (even though their overdraft policies in effect when the initial overdraft occurred indicated that I had reached the maximum length of time for consecutive day overdrawn account charges) so the $125 deposit will not be enough to bring the balance up. The new policy going into effect has caused another $392 in fees (14 days at $28/day) and I can not afford to put another $363 into the account to bring the balance to zero before the account is closed and the $50 closing fee is added. I just cancelled the direct deposit and let them close the account. By the end the transaction that caused a $6 overdraft that should not have been processed at all and was refunded by the merchant along with the initial overdraft fee for that transaction still resulted in $492 in fees plus another $50 for account closure for a total of $542 in fees

  • Paul B

    I have 4 pay pal transactions from my bank to pay pal marked as completed on the 7th of the month. These show up on my on-line banking as pending on the 9th. On the same day I made a cash deposit that showed up immediately. If i hadn’t deposited, it would have been two or three $35.00 fees.
    I believe the bank holds these withdrawals until they anticipate an overdraft to try and trick the account holder into overdraft by not showing the correct balance on-line.

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