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Why You Should Avoid Overdraft Protection Services

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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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